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Submitted by: Bindu Bothra(11MFC030) Alina Sarma(11MFC025) Under the guidance of: Prof. Samson Moharana
Senior Professor in Finance, P.G Department of Commerce Utkal University
MASTER OF FINANCE & CONTROL
P.G. DEPARTMENT OF COMMERCE UTKAL UNIVERSIT, VANIVIHAR BHUBANESWAR (2011-2013)
SBI AT A QUICK GLANCE
LARGEST COMMERCIAL BANK OF INDIA HAVING HIGHEST NO. OF BRANCHES AND ATMS IN INDIA(BRANCHES-19347 & ATM-25,005) HAVING HIGHEST NO. OF FOREIGN BRANCHES (156) HIGHEST AMOUNT OF CAA DEPOSITS (48.66%) PROVIDINGA WIDE RANGE OF PRODUCTS AND SERVICES
AIMING HIGH ON STRONG FOUNDations
We hereby declare that the work presented in this Project entitled ―Performance appraisal of SBI” submitted to Prof. Samson Moharana (Senior Professor in Finance), at Department of Commerce, Utkal University, Bhubaneswar is an authentic record of our original work.
Signature of the Mentor: Date:
Signature of the Candidate: Bindu Bothra Alina Sharma
The satisfaction and joy that accompanies the successful completion of a task is incomplete without mentioning the name of the person who extended his help and support in making it a success. We are greatly indebted to Prof. Samson Moharana (Senior Professor in Finance), at Department of Commerce, Utkal University, Bhubaneswar for devoting his valuable time and efforts towards our project. We thank him for being a constant source of knowledge, inspiration and help for successfully making this project. Finally, we thank all those who have directly or indirectly helped us in our project. We express our profound thanks to our teachers as well as friends who are the constant source of encouragement for us.
CERTIFICATE DECLARATION ACKNOWLEDGEMENT EXECUTIVE SUMMARY SL.NO CHAPTER 1: INTRODUCTION STATEMENT OF PROBLEM: OBJECTIVE OF STUDY: RESEARCH METHODOLOGY: LIMITATIONS OF STUDY
CHAPTER 2: CHAPTER 3:
THE BANKING REFORMS & BASEL II ACCORD COMPANY PROFILE STATE BANK OF INDIA CAMELS FRAMEWORK THE CAMELS FRAMEWORK CAPITAL ADEQUACY ASSET MANAGEMENT MANAGEMENT SOUNDNESS EARNINGS & PROFITABILITY LIQUIDITY SENSITIVITY TO MARKET RISK DATA ANALYSIS & INTERPRETATIONCHAPTER SUGGESTIONS & CONCLUSION
CHAPTER 5: CHAPTER 6: BIBLIOGRAPHY
LISTS OF TABLES & GRAPH:TABLES:a) Debt Equity Ratio b) Total Advance to Total Asset Ratio c) Government Securities to Total Investments d) Gross NPA ratio e) Net NPA ratio f) Total Advance to Total Deposit Ratio g) Business per Employee h) Profit per Employee i) Return on Asset j) Operating Profit by Average Working Fund k) Net Profit to Average Asset l) Interest Income to Total Income m) Other Income to Total Income n) Liquidity Asset to Total Asset o) Government Securities to Total Asset p) Approved Securities to Total Asset q) Liquidity Asset to Demand Deposit r) Liquidity Asset to Total Deposit
GRAPHS:1. Debt Equity Ratio 2. Total Advance to Total Asset Ratio 3. Government Securities to Total Investments 4. Net NPA ratio 5. Total Advance to Total Deposit Ratio 6. Business per Employee 7. Profit per Employee 8. Return on Asset 9. Operating Profit by Average Working Fund 10.Net Profit to Average Asset 11.Interest Income to Total Income 12.Other Income to Total Income 13.Liquidity Asset to Total Asset 14.Government Securities to Total Asset 15.Approved Securities to Total Asset 16.Liquidity Asset to Demand Deposit 17.Liquidity Asset to Total Deposit
Due to the nature of banking and the important role of banks in the economy in capital formation, banks should be more closely watched than any other types of economic unit in the economy. Indian banking system has transformed in recent years due to globalization in the world market, which has resulted in fierce competition. Banking sector is one of the fastest growing sectors in India. Today‘s banking sector becoming more complex. Evaluating Indian banking sector is not an easy task. There are so many factors, which need to be taken care while differentiating good banks from bad ones. To evaluate the performance of banking sector we have chosen the CAMEL model which measures the performance of banks from each of the important parameter like Capital Adequacy, Assets Quality, Management Efficiency, Earning Quality and Liquidity. The CAMEL supervisory improvement over the earlier system in terms of frequency, coverage and focus. In the present study an attempt is made to evaluate relative performance of banks using CAMEL approach. Each parameter of CAMEL—Capital Adequacy, Asset Quality, Management Quality, Earning Quality and Liquidity has been evaluated taking various ratios.
CHAPTER -1 INTRODUCTION OF BANKING SECTOR
The Indian banking sector performed better in 2010-11 over the previous year despite the challenging operational environment. The banking business of Scheduled Commercial Banks (SCBs) recorded higher growth in 2010-11 as compared with their performance during the last few years. Credit grew at 22.9 per cent and deposits grew at 18.3 per cent in 2010-11 over the previous year. Accordingly, the outstanding credit-deposit ratio of SCBs increased to 76.5 per cent in 2010-11 as compared with 73.6 per cent in the previous year. Despite the growing pressures on margins owing to higher interest rate environment, the return on assets (RoA) of SCBs improved to 1.10 per cent in 2010- 11 from 1.05 per cent in 2009-10. The capital to risk weighted assets ratio under both Basel I and II frameworks at 13.0 per cent and 14.2 per cent, respectively in 2010-11 remained well above the required minimum of 9 per cent. The gross NPAs to gross advances ratio declined to 2.25 per cent in 2010-11 from 2.39 per cent in 2009-10, displaying improvement in asset quality of the banking sector. Though there was improvement in the penetration of banking services in 2010-11 over the previous year, the extent of financial exclusion continued to be staggering. The number of complaints received at the Banking Ombudsman offices witnessed decline in 2010-11 over the previous year.
The word bank means an organization where people and business can invest or borrow money; change it to foreign currency etc. According to Halsbury ³A Banker is an individual, Partnership or Corporation whose sole pre-dominant business is banking, that is the receipt of money on current or deposit account, and the payment of cheque drawn and the collection of cheque paid in by a customer.
The Origin and Use of Banks
The Word ―Bank‖ is derived from the Italian word ―Banko‖ signifying a bench, which was erected in the market-place, where it was customary to exchange money. The Lombard Jews were the first to practice this exchange business, the first bench having been established in Italy A.D. 808. Some authorities assert that the Lombard merchants commenced the business of money-dealing, employing bills of exchange as remittances, about the beginning of the thirteenth century. About the middle of
the twelfth century it became evident, as the advantage of coined money was gradually acknowledged, that there must be some controlling power, some corporation which would undertake to keep the coins that were to bear the royal stamp up to a certain standard of value; as, independently of the µsweating¶ which invention may place to the credit of the ingenuity of the Lombard merchants- all coins will, by wear or abrasion, become thinner, and consequently less valuable; and it is of the last importance, not only for the credit of a country, but for the easier regulation of commercial transactions, that the metallic currency be kept as nearly as possible up to the legal standard. Much unnecessary trouble and annoyance has been caused formerly by negligence in this respect. The gradual merging of the business of a goldsmith into a bank appears to have been the way in which banking, as we now understand the term, was introduced into England; and it was not until long after the establishment of banks in other countries-for state purposes, the regulation of the coinage, etc. that any large or similar institution was introduced into England. It is only within the last twenty years that printed cheques have been in use in that establishment. First commercial bank was Bank of Venice which was established in 1157 in Italy. STATEMENT OF PROBLEM: The study is conducted to analyse state Bank of India on the basis of CAMELS model. OBJECTIVE OF STUDY: To evaluate the strength of State Bank of India by using CAMELS model technique. RESEARCH METHODOLOGY: 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 Business journals, Newspaper, company prospectus, company annual reports and RBI websites. To achieve our objective we have calculated ratios as per CAMEL Framework:
LIMITATIONS OF STUDY 1. Time and resources constraints. 2. The study was completely done on the basis of ratios calculated from the balance sheets. 3. It has not been possible to get a personal interview with the top management employees of State bank of Bank. 4. It has not been possible to get sensitive real data on actual CAMELS analysis performed by the RBI on State bank of India.
CHAPTER-2 BANKING Reforms & basel accord
THE BANKING REFORMS
In 1991, the Indian economy went through a process of economic liberalization, which was followed up by the initiation of fundamental reforms in the banking sector in 1992. The banking reform package was based on the recommendations proposed by the Narasimham Committee Report (1991) that advocated a move to a more market oriented banking system, which would operate in an environment of prudential regulation and transparent accounting. One of the primary motives behind this drive was to introduce an element of market discipline into the regulatory process that would reinforce the supervisory effort of the Reserve Bank of India (RBI). Market discipline, especially in the financial liberalization phase, reinforces regulatory and supervisory efforts and provides a strong incentive to banks to conduct their business in a prudent and efficient manner and to maintain adequate capital as a cushion against risk exposures. Recognizing that the success of economic reforms was contingent on the success of financial sector reform as well, the government initiated a fundamental banking sector reform package in 1992. Banking sector, the world over, is known for the adoption of multidimensional strategies from time to time with varying degrees of success. Banks are very important for the smooth functioning of financial markets as they serve as repositories of vital financial information and can potentially alleviate the problems created by information asymmetries. From a central bank‘s perspective, such high-quality disclosures help the early detection of problems faced by banks in the market and reduce the severity of market disruptions. Consequently, the RBI as part and parcel of the financial sector deregulation, attempted to enhance the transparency of the annual reports of Indian banks by, among other things, introducing stricter income recognition and asset classification rules, enhancing the capital adequacy norms, and by requiring a number of additional disclosures sought by investors to make better cash flow and risk assessments. During the pre economic reforms period, commercial banks & development financial institutions were functioning distinctly, the former specializing in short & medium term financing, while the latter on long term lending & project financing. Commercial banks were accessing short term low cost funds thru savings investments like current accounts, savings bank accounts & short duration fixed deposits, besides collection float. Development Financial Institutions (DFIs) on the other hand, were essentially depending on budget allocations for long term lending at a concessionary rate of interest. The scenario has changed radically during the post reforms period, with the resolve of the government not to fund the DFIs through budget allocations. DFIs like IDBI, IFCI & ICICI had posted dismal financial results. Infect, their very viability has become a question mark. Now, they have taken the route of reverse merger with IDBI bank & ICICI bank thus converting them into the universal banking system.
BASEL - II ACCORD
Bank capital framework sponsored by the world's central banks designed to promote uniformity, make regulatory capital more risk sensitive, and promote enhanced risk management among large, internationally active banking organizations. The International Capital Accord, as it is called, will be fully effective by January 2008 for banks active in international markets. Other banks can choose to "opt in," or they can continue to follow the minimum capital guidelines in the original Basel Accord, finalized in 1988. The revised accord (Basel II) completely overhauls the 1988 Basel Accord and is based on three mutually supporting concepts, or "pillars," of capital adequacy. The first of these pillars is an explicitly defined regulatory capital requirement, a minimum capitalto-asset ratio equal to at least 8% of risk-weighted assets. Second, bank supervisory agencies, such as the Comptroller of the Currency, have authority to adjust capital levels for individual banks above the 9% minimum when necessary. The third supporting pillar calls upon market discipline to supplement reviews by banking agencies. Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. The final version aims at: 1. Ensuring that capital allocation is more risk sensitive; 2. Separating operational risk from credit risk, and quantifying both; 3. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage. While the final accord has largely addressed the regulatory arbitrage issue, there are still areas where regulatory capital requirements will diverge from the economic. Basel II has largely left unchanged the question of how to actually define bank capital, which diverges from accounting equity in important respects. The Basel I definition, as modified up to the present, remains in place.
The Accord in operation Basel II uses a "three pillars" concept – (1) Minimum capital requirements (addressing risk), (2) Supervisory review and (3) Market discipline – to promote greater stability in the financial system. The Basel I accord dealt with only parts of each of these pillars. For example: with respect to the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while market risk was an afterthought; operational risk was not dealt with at all.
1. The First Pillar The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk and market risk. Other risks are not considered fully quantifiable at this stage. The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach, Foundation IRB and Advanced IRB. IRB stands for "Internal Rating-Based Approach". For operational risk, there are three different approaches - basic indicator approach, standardized approach and advanced measurement approach. For market risk the preferred approach is VaR (value at risk). As the Basel II recommendations are phased in by the banking industry it will move from standardized requirements to more refined and specific requirements that have been developed for each risk category by each individual bank. The upside for banks that do develop their own bespoke risk measurement systems is that they will be rewarded with potentially lower risk capital requirements. In future there will be closer links between the concepts of economic profit and regulatory capital. Credit Risk can be calculated by using:-
1. Standardized Approach 2. Foundation IRB (Internal Ratings Based) Approach 3. Advanced IRB Approach The standardized approach sets out specific risk weights for certain types of credit risk. The standard risk weight categories are used under Basel 1 and are 0% for short term government bonds, 20% for exposures to OECD Banks, 50% for residential mortgages and 100% weighting on commercial loans. A new 150% rating comes in for borrowers with poor credit ratings. The minimum capital requirement (the percentage of risk weighted assets to be held as capital) has remains at 8%. For those Banks that decide to adopt the standardized ratings approach they will be forced to rely on the ratings generated by external agencies. Certain Banks are developing the IRB approach as a result. 2. The Second Pillar The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It also provides a framework for dealing with all the other risks a bank may face, such as systemic risk, pension risk, concentration risk, strategic risk, reputation risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. It gives banks a power to review their risk management system. 3. The Third Pillar The third pillar greatly increases the disclosures that the bank must make. This is designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counterparties of the bank to price and deal appropriately. The new Basel Accord has its foundation on three mutually reinforcing pillars that allow banks and bank supervisors to evaluate properly the various risks that banks face and realign regulatory capital more closely with underlying risks. The first pillar is compatible with the credit risk, market risk and operational risk. The regulatory capital will be focused on these three risks. The second pillar gives the bank responsibility to exercise the best ways to manage the risk specific to that bank. Concurrently, it also casts responsibility on the supervisors to review and validate banks‘ risk measurement models. The third pillar on market discipline is used to leverage the influence that other market players can bring. This is aimed at improving the transparency in banks and improves reporting.
CHAPTER-3 COMPANY PROFILE
The State Bank of India, the country‘s oldest Bank and a premier in terms of balance sheet size, number of branches, market capitalization and profits is today going through a momentous phase of Change and Transformation – the two hundred year old Public sector behemoth is today stirring out of its Public Sector legacy and moving with an ability to give the Private and Foreign Banks a run for their money. The bank is entering into many new businesses with strategic tie ups – Pension Funds, General Insurance, Custodial Services, Private Equity, Mobile Banking, Point of Sale Merchant Acquisition, Advisory Services, structured products etc – each one of these initiatives having a huge potential for growth. The Bank is forging ahead with cutting edge technology and innovative new banking models, to expand its Rural Banking base, looking at the vast untapped potential in the hinterland and proposes to cover 100,000 villages in the next two years. It is also focusing at the top end of the market, on whole sale banking capabilities to provide India‘s growing mid / large Corporate with a complete array of products and services. It is consolidating its global treasury operations and entering into structured products and derivative instruments. Today, the Bank is the largest provider of infrastructure debt and the largest arranger of external commercial borrowings in the country. It is the only Indian bank to feature in the Fortune 500 list. The Bank is changing outdated front and back end processes to modern customer friendly processes to help improve the total customer experience. With about 8500 of its own 10000 branches and another 5100 branches of its Associate Banks already networked, today it offers the largest banking network to the Indian customer. The Bank is also in the process of providing complete payment solution to its clientele with its over 21000 ATMs, and other electronic channels such as Internet banking, debit cards, mobile banking, etc. With four national level Apex Training Colleges and 54 learning Centres spread all over the country the Bank is continuously engaged in skill enhancement of its employees. Some of the training programes are attended by bankers from banks in other countries.
The bank is also looking at opportunities to grow in size in India as well as Internationally. It presently has 82 foreign offices in 32 countries across the globe. It has also 7 Subsidiaries in India – SBI Capital Markets, SBICAP Securities, SBI DFHI, SBI Factors, SBI Life and SBI Cards - forming a formidable group in the Indian Banking scenario. It is in the process of raising capital for its growth and also consolidating its various holdings. Throughout all this change, the Bank is also attempting to change old mindsets, attitudes and take all employees together on this exciting road to Transformation. In a recently concluded mass internal communication programme termed ‗Parivartan‘ the Bank rolled out over 3300 two day workshops across the country and covered over 130,000 employees in a period of 100 days using about 400 Trainers, to drive home the message of Change and inclusiveness. The workshops fired the imagination of the employees with some other banks in India as well as other Public Sector Organizations seeking to emulate the programme. The CNN IBN, Network 18 recognized this momentous transformation journey, the State Bank of India is undertaking, and has awarded the prestigious Indian of the Year – Business, to its Chairman, Mr. O. P. Bhatt in January 2008. The elephant has indeed started to dance. The origin of the State Bank of India goes back to the first decade of the nineteenth century with the establishment of the Bank of Calcutta in Calcutta on 2 June 1806. Three years later the bank received its charter and was re-designed as the Bank of Bengal (2 January 1809 ). A unique institution, it was the first jointstock bank of British India sponsored by the Government of Bengal. The Bank of Bombay (15 April 1840) and the Bank of Madras (1 July 1843) followed the Bank of Bengal. These three banks remained at the apex of modern banking in India till their amalgamation as the Imperial Bank of India on 27 January 1921. Primarily Anglo-Indian creations, the three presidency banks came into existence either as a result of the compulsions of imperial finance or by the felt needs of local European commerce and were not imposed from outside in an arbitrary manner to modernise India's economy. Their evolution was, however, shaped by ideas culled from similar developments in Europe and England, and was influenced by changes occurring in the structure of both the local trading environment and those in the relations of the Indian economy to the economy of Europe and the global economic framework.
SWOT ANALYSIS OF SBI
STRENGTHS: It is the largest bank of India in terms of market share, revenue & asset. As per recent data the bank has more than outlets & ATM centers. It has its presence in 32 countries engaging currency trade all over the world. The bank has merged with Stata Bank of Saurashtra, State Bank of Indore and the bank is planning to go further acquisition in current FY-2012 It has the first mover advantage in commercial banking services SBI has recently Changed its vision & mission statement showing sign up inclination towards new age banking services It has a powerful brand name over the country & overseas. It became the synonymous for banking in rural area. SBI has a portfolio of product and services. It succeeded in cross selling of its product and services. All the branches of SBI has core banking which enable the customer to bank anywhere same as local bank.
Weakness: Lack of proper technology driven services when compared to private banks. Employees show reluctance to solve issues quickly due to higher job security and customers‘ waiting period is long when compared to private banks. The banks spends a huge amount on its rented buildings. SBI has the largest number of employees in banking sector, hence the bank spends a considerable amount of its income in employee‘s salary compensation. In spite of modernization, the bank still carries the perception of traditional bank to new age customers. SBI fails to attract salary accounts of corporate and many government sector employees salary accounts are also shifted to private bank for ease of operations unlike before. It is fully computerized but lack of computer efficiency made the banking very slow. NPA in credit card is more. Resistance from employees and trade union against merger of associate bank.
Opportunities: SBI‘s merger with five more banks namely State Bank of Hydrabad, State bank of Patiala, State bank of Bikaner and Jaipur, State of bank of Travancore and State bank of Mysore are in approval stage Mergers will result in expansion of market share to defend its number one position SBI is planning to expand and invest in international operations due to good inflow of money from Asian Market Since the bank is yet to modernize few of its banking operations, there is a better scope of using advanced technologies and software to improve customer relations Young and talented pool of graduates and B schools are in rise to open new horizon to so called ―old government bank”
Threats: Net profit of the year has decline from 9166.05 in the year FY 2010 to 7,370.35 in the year FY2011 This shows the reduce in market share to its close competitor ICICI Other private banks like HDFC, AXIS bank etc FDIs allowed in banking sector is increased to 49% , this is a major threat to SBI as people tend to switch to foreign banks for better facilities and technologies in banking service Other government banks like PNB, Andhra, Allahabad bank and Indian bank are showing Customer prefer to switch to private banks and financial service providers for loans and mortgages, as SBI involves stringent verification procedures and take long time for processing
BUDGET HIGHLIGHTS: The government is committed to protect the financial health of PSB for FY2012-13. Govt. is proposed to provide 15888cr for capitalization of PSB. Govt. is also examining the possibility of creating a financial holding company to meet the capital requirement of PSB. It has proposed to raise the target for agricultural credit to 575000 cr. this move will increase the NPA of PSB. FM proposed to enhance the additional subvention to 3%, it will be negative for PSB in terms of NIM. FM has made interest income up to Rs.10,000 from a saving bank account exempted from tax, it will boost to mobilize the low cost deposit and provide another attraction to draw customer. Signal on interest rates.
HIGH LIGHT OF SBI Q3 RESULTS: SBI has reported a slippage of Rs.8,161 & 85% rising in provisioning. Provision amount Rs.1200cr has set aside for Kingfisher (bad loan). What is more ironical is kingfisher has become NPA even after debt recast in 2010 for around Rs.7000 cr. Other contributor to this slippage are iron ore & steel, sugar, textile, plastic. Segment wise large corporate account for Rs.4,000cr., SME for Rs.21,00cr., agriculture loan Rs.1,100cr., retail Rs.400 cr. & Rs.600 from international operation. The gross NPA of bank touched a record 40,0098 crore. Despite of massive provisioning the bank beat market & analyst forecast Its net profit rise at Rs.3,263crore on higher interest income and margin. Chairman Pratip Chaudhuri says NPA have plateaued.
DOWNGRADATION OF SBI
SBI was downgraded to D+ from C- , citing capital constraint quality and quantity of assets in Octobert, 2011. After this Bankex lost 22.93% & benchmark sensex fell 17.55%. HDFC bank Ltd. Topped the chart in terms of market capitalisation. Its market capitalisation has dropped 36.64% and wealth eroded by 65000 cr. O.P. Bhatt who was helm for 5 years in his passion for regaining & market tried to expand its loan book & mopped up deposit at high cost. Some of these loans turned bad and slow down in economy worsened the scenario further.
SOME RECENT STEPS TAKEN BY SBI:
IT has launched a one time settelement scheme for recovering bad loan in MSME borrower. IT has cut the interest rate on education loan 25-100bps It has increased interest rate to 8% on deposit across various maturity below one year. It has plan to open around 100 branches in abroad in Nepal, Singapore, Australia, U.S.A & Britain. It has raised retail deposit rate by 25-100 bps.
In a path of global banking, There are so many challenges which are as follows: Higher capital requirement to meet basal- 3 target. Slowdown in economy due to high interest & inflation May face significant head winds due to tighter margin dip in credit growth. Mounting pressure due to exposure to sensitive sector like power, aviation, textile, telecom. Volatility of rupee may lead to further tightening of liquidity. High chances of corporate debt restructuring. Impose of pre-condition before capital infusion as it is invested Rs.1000 crore in life insurance business and providing para banking activities. Monitoring of RBI its global operation as it has expand its global operation. Quality of human capital will be the single most important defining factor as 80% of general maneger,65% of DGM, 58% OF AGM &44% OF CM would be retiring. Liquidity deficit in banking sector.
CHAPTER-4 CAMEL FRAMEWORK
The CAMELS FRAMEWORK
Sound financial health of the bank is the guarantee not only its depositor‘s but is equally significant for the shareholders, employees, as well as the whole economy. As a sequel to the maxim, efforts have been made from time to time, to measure the financial position of each bank and mange it efficiently and effectively. The latest CAMEL Model is used to apprise the financial performance of the banks. During an on-site bank exam, supervisors gather private information, such as details on problem loans, with which to evaluate a bank's financial condition and to monitor its compliance with laws and regulatory policies. A key product of such an exam is a supervisory rating of the bank's overall condition, commonly referred to as a CAMELS rating. The acronym "CAMEL" refers to the five components of a bank's condition that are assessed: Capital adequacy, Asset quality, Management, Earnings, and Liquidity A sixth component, a bank's Sensitivity to market risk, was added in 1997; hence the acronym was changed to CAMELS. CAMELS is basically a ratio-based model for evaluating the performance of banks. Various ratios forming this model are explained below: 1. C- Capital Adequacy: Capital base of financial institutions facilitates depositors in forming their risk perception about the institutions. Also, it is the key parameter for financial managers to maintain adequate levels of capitalization. Moreover, besides absorbing unanticipated shocks, it signals that the institution will continue to honour its obligations. The most widely used indicator of capital adequacy is capital to risk-weighted assets ratio (CRWA). According to Bank Supervision Regulation Committee (The Basle Committee) of Bank for International Settlements, a minimum 9 percent CRWA is required. Capital adequacy ultimately determines how well financial institutions can cope with shocks to their balance sheets. Thus, it is useful to track capitaladequacy ratios that take into account the most important financial risks—foreign exchange, credit, and interest rate risks—by assigning risk weightings to the institution‘s assets. 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. The following ratios measure capital adequacy:
s) Capital Risk Adequacy Ratio: CRAR is a ratio of Capital Fund to Risk Weighted Assets. Reserve Bank of India prescribes Banks to maintain a minimum Capital to risk-weighted Assets Ratio (CRAR) of 9 % with regard to credit risk, market risk and operational risk on an ongoing basis, as against 8 % prescribed in Basel documents. Total capital includes tier-I capital and Tier-II capital. Tier-I capital includes paid up equity capital, free reserves, intangible assets etc. Tier-II capital includes long term unsecured loans, loss reserves, hybrid debt capital instruments etc. The higher the CRAR, the stronger is considered a bank, as it ensures high safety against bankruptcy. CRAR = Capital/ Total Risk Weighted Credit Exposure t) Debt Equity Ratio: This ratio indicates the degree of leverage of a bank. It indicates how much of the bank business is financed through debt and how much through equity. This is calculated as the proportion of total asset liability to net worth. ‗Outside liability‘ includes total borrowing, deposits and other liabilities. ‗Net worth‘ includes equity capital and reserve and surplus. Higher the ratio indicates less protection for the creditors and depositors in the banking system. Borrowings/ (Share Capital + reserves) u) Total Advance to Total Asset Ratio: This is the ratio of the total advanced to total asset. This ratio indicates banks aggressiveness in lending which ultimately results in better profitability. Higher ratio of advances of bank deposits (assets) is preferred to a lower one. Total advances also include receivables. The value of total assets is excluding the revolution of all the assets. Total Advances/ Total Asset v) Government Securities to Total Investments: The percentage of investment in government securities to total investment is a very important indicator, which shows the risk taking ability of the bank. It indicates a bank‘s strategy as being high profit high risk or low profit low risk. It also gives a view as to the availability of alternative investment opportunities. Government securities are generally considered as the most safe debt instrument,
which, as a result, carries the lowest return. Since government securities are risk free, the higher the government security to investment ratio, the lower the risk involved in a bank‘s investments. Government Securities/ Total Investment 2. A – Asset Quality: Asset quality determines the healthiness of financial institutions against loss of value in the assets. The weakening value of assets, being prime source of banking problems, directly pour into other areas, as losses are eventually written-off against capital, which ultimately expose the earning capacity of the institution. With this backdrop, the asset quality is gauged in relation to the level and severity of nonperforming assets, adequacy of provisions, recoveries, distribution of assets etc. Popular indicators include nonperforming loans to advances, loan default to total advances, and recoveries to loan default ratios. The solvency of financial institutions typically is at risk when their assets become impaired, so it is important to monitor indicators of the quality of their assets in terms of overexposure to specific risks, trends in nonperforming loans, and the health and profitability of bank borrowers— especially the corporate sector. Share of bank assets in the aggregate financial sector assets: In most emerging markets, banking sector assets comprise well over 80 per cent of total financial sector assets, whereas these figures are much lower in the developed economies. Furthermore, deposits as a share of total bank liabilities have declined since 1990 in many developed countries, while in developing countries public deposits continue to be dominant in banks. In India, the share of banking assets in total financial sector assets is around 75 per cent, as of end-March 2008. There is, no doubt, merit in 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 emphasize 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 nonbanking 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. Higher ratio is indicative of poor credit decision-making.
NPA: Non-Performing Assets: Advances are classified into performing and non-performing advances (NPAs) as per RBI guidelines. NPAs are further classified into sub-standard, doubtful and loss assets based on the criteria stipulated by RBI. An asset, including a leased asset, becomes nonperforming when it ceases to generate income for the Bank. An NPA is a loan or an advance where: 1. 2. 3. 4. Interest and/or instalment of principal remains overdue for a period of more than 90 days in respect of a term loan; The account remains "out-of-order'' in respect of an Overdraft or Cash Credit (OD/CC); The bill remains overdue for a period of more than 90 days in case of bills purchased and discounted; A loan granted for short duration crops will be treated as an NPA if the instalments 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 instalments 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 ot 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. The following ratios are necessary to assess the asset quality. I. Gross NPA ratio:
This ratio is used to check whether the bank's gross NPAs are increasing quarter on quarter or year on year. If it is, indicating that the bank is adding a fresh stock of bad loans. It would mean the bank is either not exercising enough caution when offering loans or is too lax in terms of following up with borrowers on timely repayments. Gross NPA/ Total Loan
Net NPA ratio:
Net NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also wear down the value of the asset. Loans and advances usually represent the largest asset of most of the banks. It monitors the quality of the bank‘s loan portfolio. The higher the ratio, the higher the credits risk. Net NPA/Total Loan 3. M – Management: 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. 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 advance to total deposit, business per employee and profit per employee helps in gauging the management quality of the banking institutions. Several indicators, however, can jointly serve—as, for instance, efficiency measures do—as an indicator of management soundness. The ratios used to evaluate management efficiency are described as under:
a. Total Advance to Total Deposit Ratio: This ratio measures the efficiency and ability of the banks management in converting the deposits available with the banks (excluding other funds like equity capital, etc.) into high earning advances. Total deposits include demand deposits, saving deposits, term deposit and deposit of other bank. Total advances also include the receivables. Total Advance/ Total Deposit
b. Business per Employee: Revenue per employee is a measure of how efficiently a particular bank is utilizing its employees. Ideally, a bank wants the highest business per employee possible, as it denotes higher productivity. In general, rising revenue per employee is a positive sign that suggests the bank is finding ways to squeeze more sales/revenues out of each of its employee. Total Income/ No. of Employees c. Profit per Employee: This ratio shows the surplus earned per employee. It is arrived at by dividing profit after tax earned by the bank by the total number of employee. The higher the ratio shows good efficiency of the management. Profit after Tax/ No. of Employees E – Earning & 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 Interest Income to Total Income and Other income to Total Income is also in used. Compared with most other indicators, trends in profitability can be more difficult to interpret—for instance, unusually high profitability can reflect excessive risk taking. The following ratios try to assess the quality of income in terms of income generated by core activity – income from landing operations. i. Dividend Payout Ratio: Dividend payout ratio shows the percentage of profit shared with the shareholders. The more the ratio will increase the goodwill of the bank in the share market. Dividend/ Net profit
Return on Asset:
Net profit to total asset indicates the efficiency of the banks in utilizing their assets in generating profits. A higher ratio indicates the better income generating capacity of the assets and better efficiency of management in future. Net Profit/ Total Asset iii. Operating Profit by Average Working Fund:
This ratio indicates how much a bank can earn from its operations net of the operating expenses for every rupee spent on working funds. Average working funds are the total resources (total assets or total liabilities) employed by a bank. It is daily average of total assets/ liabilities during a year. The higher the ratio, the better it is. This ratio determines the operating profits generated out of working fund employed. The better utilization of the funds will result in higher operating profits. Thus, this ratio will indicate how a bank has employed its working funds in generating profits. Operating Profit/ Average Working Fund iv. Net Profit to Average Asset:
Net profit to average asset indicates the efficiency of the banks in utilizing their assets in generating profits. A higher ratio indicates the better income generating capacity of the assets and better efficiency of management. It is arrived at by dividing the net profit by average assets, which is the average of total assets in the current year and previous year. Thus, this ratio measures the return on assets employed. Higher ratio indicates better earning potential in the future. Net Profit/ Average Asset v. Interest Income to Total Income:
Interest income is a basic source of revenue for banks. The interest income total income indicates the ability of the bank in generating income from its lending. In other words, this ratio measures the income from lending operations as a percentage of the total income generated by the bank in a year. Interest income includes income on advances, interest on deposits with the RBI, and dividend income. Interest Income/ Total Income
Other Income to Total Income:
Fee based income account for a major portion of the bank‘s other income. The bank generates higher fee income through innovative products and adapting the technology for sustained service levels. The higher ratio indicates increasing proportion of fee-based income. The ratio is also influenced by gains on government securities, which fluctuates depending on interest rate movement in the economy. Other Income/ Total Income 4. L – Liquidity: An adequate liquidity position refers to a situation, where institution can obtain sufficient funds, either by increasing liabilities or by converting its assets quickly at a reasonable cost. It is, therefore, generally assessed in terms of overall assets and liability management, as mismatching gives rise to liquidity risk. Efficient fund management refers to a situation where a spread between rate sensitive assets (RSA) and rate sensitive liabilities (RSL) is maintained. The most commonly used tool to evaluate interest rate exposure is the Gap between RSA and RSL, while liquidity is gauged by liquid to total asset ratio. Initially solvent financial institutions may be driven toward closure by poor management of short-term liquidity. Indicators should cover funding sources and capture large maturity mismatches. The term liquidity is used in various ways, all relating to availability of, access to, or convertibility into cash. An institution is said to have liquidity if it can easily meet its needs for cash either because it has cash on hand or can otherwise raise or borrow cash. A market is said to be liquid if the instruments it trades can easily be bought or sold in quantity with little impact on market prices. An asset is said to be liquid if the market for that asset is liquid. The common theme in all three contexts is cash. A corporation is liquid if it has ready access to cash. A market is liquid if participants can easily convert positions into cash— or conversely. An asset is liquid if it can easily be converted to cash. The liquidity of an institution depends on: 1. The institution's short-term need for cash; 2. Cash on hand; 3. Available lines of credit; 4. The liquidity of the institution's assets; 5. The institution's reputation in the market place—how willing will counterparty is to transact trades with or lend to the institution? The ratios suggested to measure liquidity under CAMELS Model are as follows:
1) Liquidity Asset to Total Asset: Liquidity for a bank means the ability to meet its financial obligations as they come due. Bank lending finances investments in relatively illiquid assets, but it fund its loans with mostly short term liabilities. Thus one of the main challenges to a bank is ensuring its own liquidity under all reasonable conditions. Liquid assets include cash in hand, balance with the RBI, balance with other banks (both in India and abroad), and money at call and short notice. Total asset include the revaluations of all the assets. The proportion of liquid asset to total asset indicates the overall liquidity position of the bank. Liquidity Asset/ Total Asset 2) Government Securities to Total Asset: Government Securities are the most liquid and safe investments. This ratio measures the government securities as a proportion of total assets. Banks invest in government securities primarily to meet their SLR requirements, which are around 25% of net demand and time liabilities. This ratio measures the risk involved in the assets hand by a bank. Government Securities/ Total Asset 3) Approved Securities to Total Asset: Approved securities include securities other than government securities. This ratio measures the Approved Securities as a proportion of Total Assets. Banks invest in approved securities primarily after meeting their SLR requirements, which are around 25% of net demand and time liabilities. This ratio measures the risk involved in the assets hand by a bank. Approved Securities/ Total Asset
4) Liquidity Asset to Demand Deposit: This ratio measures the ability of a bank to meet the demand from deposits in a particular year. Demand deposits offer high liquidity to the depositor and hence banks have to invest these assets in a highly liquid form. Liquidity Asset/ demand Deposit
5) Liquidity Asset to Total Deposit: This ratio measures the liquidity available to the deposits of a bank. Total deposits include demand deposits, savings deposits, term deposits and deposits of other financial institutions. Liquid assets include cash in hand, balance with the RBI, balance with other banks (both in India and abroad), and money at call and short notice. Liquidity Asset/ Total Deposit S – 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. Interest Rate Risk Basics: In the most simplistic terms, interest rate risk is a balancing act. Banks are trying to balance the quantity of reprising assets with the quantity of repricing liabilities. For example, when a bank has more liabilities repricing in a rising rate environment than assets repricing, 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 repricing at higher rates. 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 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 be mark-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. Book-value 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.
CHAPTER-5 DATA INTERPRETATION & ANALYSIS
C- CAPITAL ADEQUACY
1. Capital risk Adequacy Ratio
Year 2006-07 2007-08 2008-09 2008-09 2009-10 2009-10 2010-11 2. 2010-11 Basel-I Base-I Basel-I Basel-II Basel-I Basel-II Basel-I Basel-II Tier-I 8.01 9.14 8.53 9.38 8.46 9.45 6.93 7.77 Tier-II 4.33 4.40 4.44 4.87 3.54 3.94 3.76 4.21 Ratio 12.34 13.54 12.97 14.25 12.00 13.39 10.69 11.98
16 14 12 10 8 6 4 2 0 Basel-I Base-I Basel-I Basel-II Basel-I Basel-II Basel-I Basel-II 2006-07 2007-08 2008-09 2008-9 2009-10 2009-10 2010-11 2010-11 Tier-II Tier-I
INTERPREATATION:CRAR is a ratio of Capital Fund to Risk Weighted Assets. Reserve Bank of India prescribes Banks to maintain a minimum Capital to risk-weighted Assets Ratio (CRAR) of 9 % with regard to credit risk, market risk and operational risk on an ongoing basis, as against 8 % prescribed in basal II documents.
CAR of the SBI was 11.98 which was above RBI prescribes limit. Higher the ratio the banks are in a good position to absorb losses. But from the last year it has decreased from 13.39 to 11.98.
2. Debt Equity Ratio
Year 2006-07 2007-08 2008-09 2009-10 2010-11 Borrowings(Rs.) Share capital(Rs.) 39703352 5262989 517274113 6314704 537136821 6348802 1030116011 6348826 1195689550 6349990 Reserve(Rs.) Debt equity ratio 30772575 484011911 573128162 653143160 643510442 110.17 105.49 092.69 156.19 183.99
Debtio euity ratio
2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2006-07 2007-08 2008-09 2009-10 2010-11 Debtio euity ratio
INTERPREATATION:The Debt to Equity Ratio measures how much money a bank should safely be able to borrow over long periods of time. Generally, any bank that has a debt to equity ratio of over 40% to 50% should be looked at more carefully to make sure there are no liquidity problems. The debt equity ratio of SBI has increased by 183% in the year 2011. Because the Bank's aggregate liabilities (excluding capital and reserves) rose by 17.35% from Rs. 9,87,464.53 crores on 31st March 2010 to Rs.11,58,750.16 crores on 31st March 2011. The increase in liabilities was mainly contributed by increase in deposits and borrowings so that ratio was increased.
3. Total Advance to Total Asset Ratio
Year Total Advance(Rs.) 3373364935 4167681862 5425032042 6319141520 7567194480 Total Asset(Rs.) 5665652388 4355210894 7215263121 5374039409 9644320807 7420731280 10534137305 8041162268 12237362005 9339328130 81.02 78.58 61.83 73.10 59.98 77.55 56.25 77.45 57.76 Total Deposit(Rs.) Total advance to total deposit (Rs.) Total Advance to Total Asset Ratio (%) 59.54
200607 200708 200809 200910 201011
Total Advance to Total Deposit Ratio
82 80 78 76 74 72 70 68 2006-07 2007-08 2008-09 2009-10 2010-11 Total Advance to Total Deposit Ratio
Total Advance to Total Asset Ratio
63 62 61 60 59 58 57 56 55 54 53 2006-07 2007-08 2008-09 2009-10 2010-11
Total Advance to Total Asset Ratio
Total Advance to Total Asset Ratio shows that how much amount the bank holds against its asset. Here in SBI Bank, from 2010 to 2011 this ratio is continuously increased after 2006 because increase in advances is more than increase in total assets which shows growth in investment. And that is good sign for the bank. During the year, total advances of the Bank grew by 19.75% in the previous year. Total Advance to Total Asset Ratio shows that how much amount the bank holds against its assets. Here in SBI Bank, from 2009 to 2011 this ratio is continuously increased because increase in advances is more than increase in total assets which shows growth in investment. Bank’s advances remain well distributed across all verticals. Large Corporate advances have grown to Rs.1,08,741 crores in March’11, registering a growth of 23.38%. Mid-Corporate Advances increased to Rs.1,57,565 crores with increase 19.42% growth. Retail advances grew 22.04% from 1,34,849 crores in March’10 to Rs.1,64,576 crores in March’11. SME Advances of the Bank rose by 22.80 & International advances went up by 12.66% to Rs.1,09,358 crores in March’11.
Government Securities to total Investment
Year 2006-07 2007-08 2008-09 2009-10 2010-11 Govt. Total Investment(Rs.) Govt. Securities to Securities(Rs.) Total Investment 1182708274 1491488825 158.21 1411282709 1895012709 148.73 2269600632 2759539569 164.22 2267060163 2875635892 79.53 2307414469 2855869958 81.57
Govt. Securities to Total Investment
180 160 140 120 100 80 60 40 20 0 2006-07 2007-08 2008-09 2009-10 2010-11 Govt. Securities to Total Investment
This shows the percentage of investment in govt securities. It is believed that the more investment in govt securities is a safe. As per norm stipulated by RBI the bank have to maintain SLR at the rate of 24%. In this year investment in govt securities was decreasing steeply from the last 2 years but still it is a good sign of the bank because it increasing their profitability. A-ASSET QUALITY 1. Gross NPA Year 2009-2010 2010-2011 Ratio 3.05 3.28
This ratio is used to check whether the bank's gross NPAs are increasing quarter on quarter or year on year. If it is, indicating that the bank is adding a fresh stock of bad loans. It would mean the bank is either not exercising enough caution when offering loans or is too lax in terms of following up with borrowers on timely repayments. Along with increase in credit, State Bank of India is conscious about asset quality. Though gross NPAs stood at 3.28% in March‘11 against 3.05% in March‘10. 2. Net NPA
2006-07 2007-08 2008-09 2009-10 2010-11
1.2 1 0.8 0.6 0.4 0.2 0 2006-07 2007-08 2008-09 2009-10 20010-11 Series1
Net NPA Ratio 1.56 1.78 1.79 1.72 1.63
INTERPRETATION:Net NPA reflects the performances of banks. A high level of NPAs suggests high probability of a large no of credit defaults that affect the profitability and net worth of banks and also wear down the value of asset. Loans and advances generally consider as largest asset of bank. The higher the ratio, the higher is the risk. The NPA level in 2010-11 is 1.63% which is lower than previous year‘s Net NPA 1.70 %. To comply with 70% provision coverage as up Sep. 2010. SBI had to create a 3430 cr. Counter cyclical buffer. Of this, the bank set aside Rs. 2330 cr. by March, 2011.
M- MANAGEMENT 1. Total Advance to Total Deposit Ratio
Year 2006-07 2007-08 2008-09 2009-10 2010-11
1000000 800000 600000 400000 200000 0 2006-07 2007-08 2008-09 2009-10 2010-11 Deposits Advances
Deposits(Rs.) 435521 537404 742073 804116 933933
Advances(Rs.) 337336 416768 542503 631914 756719
Total Advance to Total Deposit Ratio 77.45 77.55 73.10 78.58 81.02
INTERPRETATION:Deposits of SBI rose to 16.14% yoy from Rs.8,04,116 crores in March,10 to Rs. 9,33,933 crores in March‘11, driven by CASA growth of 22.14%. With sustained 26.20% rise in Saving Bank deposits, CASA ratio improved from 46.67% in March‘10 to 48.66% in March‘11, an increase of 199bps.
Total Advance to Total Deposit Ratio
0.82 0.8 0.78 0.76 0.74 0.72 0.7 0.68 2006-07 2007-08 2008-09 2009-10 2010-11 Total Advance to Total Deposit Ratio
INTERPRETATION:Gross Advances of SBI recorded a yoy growth of 20.32% from Rs.6,41,480 crores in March‘10 to Rs.7,71, 802 crores in March‘11. Credit Deposit Ratio (Domestic) at 76.32% as at the end of SBI advances remain well distributed across all verticals. Large Corporate advances have grown from Rs. 88,137 crores in March‘10 to Rs.1,08,741 crores in March‘11, registering a growth of 23.38%. Mid-Corporate Advances increased from to Rs.1,57,565 with 19.42% growth. Retail advances grew 22.04% to ` Rs.64,576 crores in March‘11. SME Advances of the Bank rose by 22.80% to Rs.19,676 crores in March‘11, while Agri advances rose 21.18% to Rs. 94,826 crores. International advances went up by 12.66% from ` 97,072 crores in March‘10 to ` 1,09,358 crores in March‘11. 2. Business per Employee
Business per Employee Year 2006-07 2007-08 2008-09 2009-10 2010-11 Business per Employee(Rs.) 35700 45600 55600 63600 70465 Total (Rs.)Income 44007.59 57645.24 76479.22 85962.07 97218.95
Business per Employee
80000 70000 60000 50000 40000 30000 20000 10000 0 2006-07 2007-08 2008-09 2009-10 2010-11 Business per Employee
INTERPRETATION:It shows how efficiently a particular bank is utilising its employees. Ideally a bank wants the highest business per employees. As it denotes higher productivity. Increase in this is a positive sign of Bank finding ways to squeeze more sales revenue out of its each employee. In SBI it has gone up to 70465.
3. Profit Per Employee
Year 2006-07 2007-08 2008-09 2009-10 20010-11 Profit per Employee 236.81 372.57 473.77 446.03 384.63
Profit per Employee
500 400 300 200 100 0 2006-07 2007-08 2008-09 2009-10 20010-11 Profit per Employee
INTERPRETATION:It is a measure of how efficiently a particular bank is utilizing its employee. A bank wants highest profit per employee. In this year it has decrease to 384 from 446 in 2010. That is a good sign. E- EARNING & PROFITABILITY 1. Dividend Payout Ratio
Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Dividend Payout Ratio 6.0 8.5 11.0 12.5 14.0 14.0 21.5 29.0 30.0 30.0
Dividend Pay out Ratio
35 30 25 20 15 10 5 0
Dividend Pay out Ratio
INTERPRETATION:It shows the percentage of profit shared with share holder. The higher the ratio the more will be the goodwill of company in share market. The dividend payout ratio is same as previous year that is 30% & and from last 10 years constantly it is increasing. It shows better position in the market.
Return on Asset
ROA 2006-07 2007-08 2008-09 2009-10 20010-11
1.2 1 0.8 0.6 0.4 0.2 0 2006-07 2007-08 2008-09 2009-10 20010-11 Series1
0.84 1.01 1.04 0.88 0.71
INTERPRETATION:It shows that how much return bank can get from their total asset. Higher ratio is good for bank. Because if ratio is increasing then we can say that the return of the bank is high. It has decreased from 88%t o 71%. So that bank should look after to use of assets efficiently & effectively. 3. Operating Profit by Average working Fund
Year 2006-07 2007-08 2008-09 2009-10 20010-11 Operating Profit(Rs.) 15058.2 17021.23 20873 23671.44 32526.4 Average Working fund(Rs.) 566565.2388 721526.3121 964432.0807 1053443.731 1223736.201 Operating Profit by Avg. Working fund 2.65 2.35 2.16 2.24 2.65
Operating Profit by Avg. Working fund
0.03 0.025 0.02 0.015 0.01 0.005 0 2006-07 2007-08 2008-09 2009-10 20010-11 Operating Profit by Avg. Working fund
INTERPRETATION:Earning reflect the growth capacity and the financial health of the bank. High earnings signify high growth prospects. It shows core operations of SBI remain robust. The Operating Profit of the Bank for 2010-11 stood at Rs.25,335.57 crores as compared to Rs.18,320.91 crores in 2009-10 registering an excellent growth of 38.29%. The Bank has posted a Net Profit of Rs.8,264.52 crores for 2010-11 as compared to Rs.9,166.05 crores in 2009-10 registering a decline of 9.84%. 4. Net Profit to Average Asset
Year 2001-02 2001-03 2001-04 2001-05 2001-06 2001-07 2001-08 2001-09 2001-10 2001-11 Ratio 0.73 0.86 0.94 0.99 0.89 0.84 1.01 1.04 0.88 0.71
Net Profit to AVG. Ratio
1.2 1 0.8 0.6 0.4 0.2 0 Net Profit to AVG. Ratio
INTERPRETATION:The net profit of the SBI has decreased by 9.84% from 9,166 cr. to 8,265 cr. The reasons of decreasing are due to substantial provision towards additional liability for enhance superannuation out of wage revision and increase in seiling gratuity with higher tax provision. While Net Interest Income recorded a growth of 37.41%, the Other Income increased by 5.72%, Operating Expenses increased by 13.27% attributable to higher staff cost and other expenses. 5. Interest Income to Total Income
Year Interest Income(Rs.) Other Income (Rs.) Total Income(Rs.) Interest Income to Total Income Ratio 87.71 84.41 80.00 81.99 82.87 84.62 84.91 83.40 82.58 83.31 Other Income to Total Income 12.28 15.58 19.99 18.00 17.12 15.37 15.08 16.59 17.41 16.27
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
29810.08 31087.02 30460.49 32428 35979.58 37242.33 48950.31 63788.43 70993.92 81394.36
4174.48 5740.26 7612.46 7119.9 7435.2 6765.26 8694.93 12690.79 14968.15 15824.59
33984.56 36827.28 38072.95 39547.9 43414.78 44007.59 57645.24 76479.22 85962.07 97218.95
Interest Income to Total Income Ratio
0.9 0.88 0.86 0.84 0.82 0.8 0.78 0.76
Interest Income to Total Income Ratio
INTERPRETATION:It shows that how much interest income earn from total income. Higher the ratio higher is the profit.it is the regular income from customer. This ratio has gone upto 83% in 2011 from 82% in 2010. Net Interest Margin (NIM) rose by 66 bps to 3.32% in FY‘11 from 2.66% in FY‘10, ue to faster increase in interest income (14.65%) than interest expenses (3.27%). Driven by loan growth of 20.32%, interest income on advances has increased by 18.45% yoy in FY‘11 against a growth of 9.11% in FY‘10. Growth in interest expenses was contained mainly due to CASA deposits growth of 22.14%. Consequently, net interest income increased by 37.41% to Rs.32,526 crores against 13.41% rise recorded in FY‘10. Fee income also recorded a handsome rise of 20% in FY‘11. 6. Other Income to total Income
Other Income to Total Income
0.25 0.2 0.15 0.1 0.05 0 Other Income to Total Income
INTERPRETATION:Fee based incomes account form a major source of banks income. Bank generates higher income through innovative product and services. The ratio is also influenced securities. higher is the ratio higher is the income.SBI it decreases from 17% to 16%. The Other Income increased by 5.72%, Operating Expenses increased by 13.27% attributable to higher staff cost and other expenses. Non interest income rose by 5.72%. the ratio was decreased because of proportionately
more increment in total income than other than interest income.
L-LIQUIDITY 1. Liquidity Asset to Total Asset
Year Cash & balances with Reserve Bank of India(Rs.) 290764250 515346158 555461727 612908652 943955020 Balances with banks & money at call & short notice(Rs.) 228922650 159317192 488576259 248978483 284786457 Liquidity Asset(Rs.) Total Asset(Rs.) Liquidity Asset to Total Asset
2006-07 2007-08 2008-09 2009-10 2010-11
519686900 674663350 1044037986 861887135 1228741477
5665652388 7215263121 9644320807 10534437305 12237362005
9 9 10 8 10
Liquidity Asset to Total Asset
0.12 0.1 0.08 0.06 0.04 0.02 0 2006-07 2007-08 2008-09 2009-10 2010-11 Liquidity Asset to Total Asset
INTETRPRETATION:Liquidity for a bank means ability to meet its financial Obligations as they come due. Bank lending finances investment in relatively illiquid asset but it funds its loan with mostly short term liability. Thus one of the main challenges to a bank is ensuring its own liquidity under all reasonable condition. The ratio was decreased in the year 2009 because of increment in total assets. 2. Government Securities to Total Asset
Year Govt. Govt. Total Govt. Securities in Securities Securities(Rs.) India(Rs.) outside India(Rs.) 1182708274 1177031114 2359739388 1411282709 1407340368 2818623077 2269600632 2262174704 4531775336 2267060163 20095152 2307414469 22390788 2287155315 2329805257 Govt. Securities to Total Asset 41.6499147 39.0647303 46.9890563 21.7112243 19.0384599
2006-07 2007-08 2008-09 2009-10 2010-11
Govt.Securities to Total Asset
0.5 0.4 0.3 0.2 0.1 0 2006-07 2007-08 2008-09 2009-10 2010-11 Govt.Securities to Total Asset
INTERPRETATION:Government securities to total asset ratio shows that, what percentage of government securities bank has against total assets. Higher the ratio is good for the bank because if this ratio is higher than we can say that bank is more investing in government securities. Here we can see the ratio is decreasing constantly from 2008 due to investment in other avenue.
3. Approved Securities to Total Asset
Year Other Approved Securities(Rs.) 33430589 27382517 18926808 10351255 4237113 Approved Securities to Total Asset(Rs.) 0.59 0.37 0.19 0.09 0.03
2006-07 2007-08 2008-09 2009-10 2010-11
Approved Securities to Total Asset
0.007 0.006 0.005 0.004 0.003 0.002 0.001 0 2006-07 2007-08 2008-09 2009-10 2010-11 Approved Securities to Total Asset
INTERPRETATION:Approved securities include securities other than govt. Securities. This ratio measures the approved securities as a proportion of total asset. Bank invest in this primarily after meeting their SLR requirements. This ratio measures the risk involved in the asset hand a bank. The ratio is constantly decreasing due to decrement in approved securities. Government and other approved securities. The Bank‘s market share in domestic advances was 16.40% as of March 2011. And the total assets of the Bank increased by 16.17%.
4. Liquidity Asset to Demand Deposit
Year Demand Deposit from Bank(Rs.) 109748101 Demand Deposit from others(Rs.) 710231637 Total Demand Deposit(Rs.) 819979738 981335301 Liquidity Asset(Rs.) Liquidity Asset to Demand Deposit 4.73 5.47
2006-07 2007-08 2008-09 2009-10 2010-11
123134067 858201234 107618416 999917342 89044695 87003565
1107535758 1044037986 9.70
1136749627 1225794322 861887135 9.67 1224949827 1311953392 1228741477 14.12
Liquidity Asset to Demand Deposit
16 14 12 10 8 6 4 2 0 2006-07 2007-08 2008-09 2009-10 2010-11 Liquidity Asset to Demand Deposit
ITERPRETATION:The ratio shows power of liquidity asset against total demand deposits. It means what part of demand deposit can be easily Converted into monetary form in need. In SBI, the ratio was fluctuate because of the change in the cash balance during the each year ending. In the year 2011. because of increment in cash balance,the liquidity assets were increased and vice versa the ratio was also increased.
5. Liquidity Asset to Total Deposit
Year 2006-07 2007-08 2008-09 2009-10 2010-11 Total Deposit(Rs.) Liquidity Asset(Rs.) Liquidity Asset to Total Deposit 11.93 12.55
4355210894 519686900 5374039409 674663350
7420731280 1044037986 14.06 8041162268 861887135 10.71 9339328130 1228741477 13.15
Liquidity Asset to Total Deposit
0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 2006-07 2007-08 2008-09 2009-10 2010-11 Liquidity Asset to Total Deposit
INTERPETATION:It shows how much part of the deposits invested into liquid asset, which can be easily converted into monetary value in the time need. In SBI the ratio was 14% in 2009 . then it decreased to 10% and again In 2011 it is increased to 13% due to increase in liquid asset.
COMPONENT RATINGS TO THE BANKS:Now, after analyzing the ratio next, task to do is to give weightage to all the parameters according to the importance of the ratios. Each component will be given weightage according to the importance of itself and ratios covered in that particular point. The total weightage allocated to the all parameters would be out of 100.
Overall ranking to the SBI:Ratio Capital Adequacy Capital Risk Adequacy Ratio Debt Equity Ratio Total Advance to Total Asset Ratio Government Securities to Total Asset Asset Quality Gross NPA to Total Loan Net NPA to Total Loan Management Total Advance to Total Deposits Business per Employee Profit per Employee Earnings Dividend payout Ratio Return on Asset Operating Profit to Average Working Fund Net Profit to Average Asset Interest Income to Total Income Other income to Total Income Liquidity Liquidity Asset to total Asset Government Securities to Total Security Approved Securities to Total Security Liquidity Asset to Demand deposit Liquidity Asset to Total Deposit Total Weightage Out of 28% 7% 7% 7% 7% Out of 14% 7% 7% Out of 15% 5% 5% 5% Out of 18 % 3% 3% 3% 3% 3% 3% Out of 25% 5% 5% 5% 5% 5% 100% SBI Ratings 1 1 7 5 6
5 6 5 5 2 4 2 5 2 4 3 3 1 1 1 3 =72
Overall rating has been assigned according to following tables:
The weightage given to different parameters is as follows:
TABLE - Component Weightage Parameter Capital Adequacy Asset Quality Management Earnings Liquidity Total
Weightage 28% 14% 15% 18% 25% 100%
TABLE - Capital Quality: Ratio 1 2 CRAR Below 15.5015.50 20.00 Debt-Equity Above 115-125 Ratio 125 Total Below 35-40 Advance to 35 Total Asset Government Below 58-65 Securities 58 to total Investment TABLE - Asset Quality: Ratio 1 2 Gross Above 7.50NPA to 9 9.00 Total Loan Net NPA Above 3 2.50to Total 3.00 Loan TABLE - Management Quality Ratios Total Advance to Total Deposit Business per Employee Profit per Employee
3 20.0024.50 105-115 40-45
4 24.5029.00 95-105 45-50
5 29.0033.50 85-95 50-55
6 33.5038.00 75-85 55-60
7 Above 38 Below 75 Above 60 Above 93
7 Below 1.5
1 Below 46 Below 2.5 Below2. 00
2 46-55 2.5 0 – 5.00 2.00 – 4.50
3 55-64 5.00 – 7.50 4.50 – 7.00
4 64-73 7.50 – 10.00 7.00 – 9.50
5 Above 73 Above 10 Above 9.50
TABLE - Earnings Quality: Ratios 0.50 Devidend Payout Ratio Below 10 Return on Asset Below 0.50 Operating Profit to average Below working fund 1.75 Net Profit to average Asset Below 0.50 Interest Income to Total Income Below 56 Other Income to Total Income Below 4 TABLE – Liquidity quality: 1 2 Ratios Liquidity Asset to Total Asset G-Sec to Total Asset Approved Securities to Total Asset Below 7
1.00 10 – 17 0.50 0.75 1.75 2.00 0.50 0.75 56-67 4-13.50
1.50 17 - 24 0.75 – 1.00 2.00 – 2.25 0.75 – 1.00 67-76 13.5023
2.00 24 – 31
2.50 31 – 38
3.00 Above 38
1.00 – 1.25 2.25 – 2.50 1.00 – 1.25 76-85 23-32.5
Above 1.50 Above 2.75 Above 1.50 Above 94 32.5-42 Above 42
1.25 – 1.50 2.50 – 2.75 1.25 – 1.50 85-94
5 Above 13
Below 24 Below 0.50
24 – 31 0.50 – 0.75 27 – 35 9 – 12
0.75 – 1.00 35 – 43
1.00 – 1.25 43 – 51 15 – 18
Above 1.25 Above 51 Above 18
Liquid Asset Below 27 to Demand Deposit Liquid Asset Below 9 to Total Deposit
CHAPTER -6 SUGGESTIONs & CONCLUSION
The bank should adapt itself quickly to changing norms. The bank should maintain globally standardized with the coming of BASEL-III requirement. The Bank should strengthen the internal position to cope with the international standard. NPA level of SBI is very high so the bank should take some preventive action to reduce NPA. To reduce NPA level the bank should adopt some risk management techniques. And they should give loans to the customers, whose credit worthiness is good. In State Bank of India, debt equity ratio is continuously rising over the years which are not good so they have to increase equity or reduce debts in their capital structure. Bank has to give more advances in order to earn more interest. But they should have to also keep in mind the credit worthiness of the customers. The bank should use some innovative product to compete with private banks & global banks.
State bank is the one largest public sector bank. It has shown tremendous growth over the past 5 years. State bank of India has been able to withstand the acid test of CAMELS model. However it should not rest on its laurels. SBI will also open its branches outside India. NAP of SBI has also decreased from previous year. Its CASA deposits is more than any other banks.SBI is also giving more focus on retail banking sector. It should also gear up for BASEL-III norms which are imminent in the near future. It should also strive for disruptive innovative banking practices to beat other stronger competitors, both in the domestic as well as international arena. All in all, State bank is a bank with sound fundamentals which is growing at a really fast pace but there are so many challenges which it must prepare itself for to sustain and succeed.
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