Chapter 1

Introduction about the internship:

Topic chosen for study
The title of the study is An EMPIRICAL STUDY ON CAPITAL TO RISK
ASSETS RATIO of urban co-operative bank ltd Perinthalmanna

Need of the study:
The study of CRAR analysis of UCBP ltd will enable as to know the financial
position, of UCBP ltd. The study also reveals the performance of the UCBP ltd and
also its prospects.

Objectives of the study:
The main objectives of the research are as following:
To explain the importance of risk assets ratio to analyze the performance of
the firm.
To analyze the current financial condition of the firm.
To compare the present ratios with past ratios of the firm.
To interpret the ratios to identify the strengths and weakness of the
organization.
Scope of the study:
The scope is limited to published information received from annual reports.
The study covers secoP&L a/c and balance sheet items only.
The study covers a period of three financial years ranging from 2010-11 to
2012-13.
This is so because CRAR prescribes practical standards, for each element of
the study.




METHODOLOGY ADOPTED
There are two types of data collection method which are being used in this
research:
PRIMARY DATA
SECONDARY DATA
1. Collection of Primary data:
Primary data is that type of data which includes the first hand information
which is being collected during the course of training through observations and
discussion with departmental heads, accountants, assistants and office.
Direct interaction
Observations

2. Collection of Secondary Data:
Secondary data means data that are already available i.e., they refer to the
data which have already been collected and analyzed by someone else. When the
researcher utilizes the secondary data, then he has to look into various sources from
where he can obtain them. In this case he is certainly not confronted with the
problems are usually associated with the collection of the original data secondary
data may either be published data or unpublished data.
Here in this research, I collected the secondary data from the Books, journals,
annual reports and prospects of the company, internet etc Interpretation of the
result has been done on graphical representation through bar graphs.
LITERATURE REVIEW

Limitations of the study:
The study was limited to finding the selected ratios only.
The study depends on the published data and documents such as balance
sheet and income statements.
It was difficult to obtain confidential data from the concern department with a
view point of confidentiality.
The time period of the project is restricted for short period.

Research Design:
Research design means a search of facts, answers to question and solution to
the problems. It is a prospective investigation. Research is a systematic logical study
of an issue or problem through scientific method. It is a systematic and objective
analysis and recording of controlled observation that may lead to the development of
generalization, principles, resulting in prediction and possibly ultimate control of
events.
Research design is the arrangement of conditions for the collection and
analysis of data in manner that aims to combine relevance to the research purpose
with relevance to economy. There are various designs, which are descriptive and
helpful for analytical research.












Chapter 3

THE THEORETICAL BACKGROUND OF THE STUDY
Section 5 of Banking Regulation Act, 1949 defines banking as accepting, for
the purpose of lending or investment of money from the public repayable on demand
or otherwise, and withdraw able by cheque, draft, order or otherwise.
It can be seen from above definition that major functions of the banks are
accepting deposits, lending the resources mobilized and investing to meet statutory
requirements/surplus funds. The process of lending and investment associated with
several risks like credit risk, interest rate risk, foreign exchange risk, liquidity risks,
operational risk etc.
In view of the above risks and rapid global integration of the world financial
sector mainly banking sector, supervisory authorities of group of ten countries (G 10)
namely CANADA, FRANCE, GERMANY, ITALY, JAPAN, NETHERLANDS,
SWEDEN, SWITZERLAND, USA and UK felt the requirement of a global
supervision and regulation. These countries worked for a regulatory frame work and
the governors of the above G 10 countries signed the accord titled
(INTERNATIONAL CONVERGENCE OF CAPITAL MEASUREMENT AND CAPITAL
STANDARDS) in july 1988 at the bank of international settlements (BIS), Basle,
Switzerland which came to known as BASLE COMMITTEE RECOMMENDATIONS
and adopted a capital adequacy frame work for internationally active commercial
banks.
Two fundamental objectives of this convergence are; -
1 The new framework should serve to strengthen the soundness and stability of
international banking.
2 Frame work should be fair and have a high degree of consistency in its
applications to banks in different countries with a view to diminishing an
existing source of competitive inequality among international banks.

The world financial system has witnessed a considerable economic reform in the last few
years and hence the BASLE committee decided to introduce a new capital adequacy
framework. The new capital framework consists of three pillars.
1. Minimum capital requirements
2. A supervisory review process
3. The effective use of market discipline
MINIMUM CAPITAL REQUIREMENT:
With an objective of securing soundly based and consistent capital ratios, the
target or standard ratio of capital to weighted risk assets was set as 8% of which the
core capital element would be 4%.

A SUPERVISORY REVIEW PROCESS:
This will seek to ensure that a banks capital position is consistent with its
overall risk profile. This pillar also stressed on the importance of banks management
in developing an internal capital assessment and setting targets for building capital.

THE EFFECTIVE USE OF MARKET DISCIPLINE:
This will encourage the role of market participants in encouraging banks to
hold adequate capital.
Based on the BASLE committee recommendation RBI has introduced capital
to risk assets ratio (CRAR) system to strengthen the capital base of banks for
commercial banks in the year 1993.
The fundamental objectives behind this principle are:

To strengthen the soundness and stability of banking system in INDIA
The framework should be fair and have high degree of consistence in
application to banks operating at different levels.
The concept of minimum capital to risk assets ratio (CRAR) has been developed
to ensure that banks can absorb a reasonable level of loss. Capital adequacy ratio
determines the capacity of the bank in terms of meeting the several risks associated
with its operations and the time liabilities.
A bank capital is the cushion for potential losses and there by application of
minimum CRAR protects the interest of depositors and promotes stability and
efficiency of the financial system.
The Urban co-operative banks can perform the same banking functions as
commercial banks and are exposed to similar risks in their operation. In view of this
High power committee on urban co-operative banks (HPC) constituted by the RBI in
the year may 1999 suggested various measures to augment capital base of urban
co-operative banks. Based on the HPC recommendations, RBI has decided to
implement CRAR norms to urban co-operative banks in a phased manner with effect
from 31 march 2002 over a period of three years as under:

AS ON SCHEDULED CO-
OPERATIVE BANKS
NON-SCHEDULED URBAN
CO-OPERATIVE BANKS
31
st
march 2002 8% 6%
31
st
march 2003 9% 7%
31
st
march 2004 As applicable to commercial
banks

9%
31
st
march 2005 As applicable to commercial
banks
As applicable to commercial
banks

DEFINITION OF CRAR:
Capital adequacy ratio is defined as the ratio of banks capital to its Risk
Weighted Assets.

Capital base (capital fund)
CRAR = _________________________________ x 100
Risk weighed Assets

CAPITAL FUNDS:
The capital funds can be segregated into two groups namely TIER 1 and
TIER2
TIER 1 CAPITAL:
This is also known as core capital and provides the most permanent and readily
available support to bank against unexpected losses. This would include the
following:
1. Paid up share capital collected from regular members of the bank having
voting power.
2. Statutory and other disclosed free reserves (mainly reserve fund and building
fund).
3. Capital reserve representing surplus arising out of sale proceeds of assets.
4. Any surplus in profit and loss account that is after appropriation towards
dividend payable, education fund, other funds whose utilization is defined and
asset loss if any.
NOTE: intangible assets brought forward and current losses deficit in NPA provisions
etc, will be deducted from tier 1 capital.

TIER 2 CAPITALS:
This would include the following:
1. Undisclosed reserves.
2. Revaluation reserves at discount of 55%.
3. Investment fluctuation reserves.
4. Surplus provisions/loss reserves maximum 1.25% of weighted risk assets.
5. Hybrid debt capital instruments.
6. Sub ordinate debt limited to 50% of tier 1 capital.
NOTE: 1) at present urban co-operative banks do not issue hybrid debt capital
instruments/subordinate debt, however there is no bar on issuing such instruments subject
to :
a. Provisions of respective state co-operative Act / multi state co-operative Act.
b. Prior approval from reserve bank of India for the issue instruments.
c. Tier 2 capital should not exceed tier 1 capital et any point of time.
RISK WEIGHTED ASSETS:
All assets created by the bank carry an element of risk. It is obvious that all assets whether
fund based or off-balance sheet items are weighted with a particular risk factor and
compared against the capital to determine the capital adequacy ratio.
RBI has given different percentage weight to various types of assets appearing in balance
sheet. The value of each asset item shall be multiplied by the relevant weights to arrive at
risk-adjusted values of assets and off-balance sheet items. The sum total of all risk adjusted
values of assets will be taken into account for arriving at capital to risk assets ratio (CRAR).







THE RISK WEIGHTS ALLOTED TO EACH OF THE ASSETS AND OFF-BALANCE
SHEET ITEMS:
Particular
Risk weight
(%)
I. BALANCES

i. Cash (including foreign currency notes) Balances with RBI
0
ii. Balances in current account with UCBs
20
iii. Balances in current account with other banks
20
II. INVESTMENTS

i. Investment in Central Government Securities
2.5
ii. Investment in Other Approved Securities guaranteed by Central
Government
2.5
iii. Investment in Other Approved Securities guaranteed by State
Government
2.5
iv. Investment in Other Securities where payment of interest and
repayment of principal are guaranteed by Central Govt. (include
investment in Indira/Kisan Vikas Patras and investments in
bonds & debentures where payment of interest and repayment
of principal is guaranteed by Central Govt.)
2.5
v. Investment in Other Securities where payment of interest and
repayment of principal are guaranteed by State Govt. (include
investments in bonds & debentures where payment of interest
and repayment of principal is guaranteed by Central Govt.)
2.5
or
100 (if State
Govt. is in
default)
vi. Investment in Other Approved Securities where payment of
interest and repayment of principal is not guaranteed by Central
/ State Govt./s
22.5
vii. Investment in Govt. guaranteed securities of government
undertakings which do not form part of the approved market
borrowing Program
22.5
viii. Claims on commercial banks, District Central Cooperative
Banks
20
ix. Claims on other Urban Cooperative Banks 20
x. Investments in bonds issued by All India Public financial
Institutions
22.5
xi. Investments in bonds issued by Public Financial Institutions for
their Tier-II Capital
102.5
xii. All Other Investments 102.5
III. LOANS AND ADVANCES
i. Loans guaranteed by Govt of India 0
ii. Loans guaranteed by State Govt 0
iii. Loans guaranteed by State Govts. Where guarantee has been
invoked and the concerned State Govt has remained in default
100
iv. Loans granted to PSUs of GOI 100
v. Housing Loans to individuals against mortgage of residential
housing property

50
vi. Gold Loan upto
Rs. 1 lakh
50
vii. Gold Loan above Rs. 1 lakh 125
viii. Other Loans and Advances
a) Secured


100
b) Consumer & personal loan 125
ix. Leased Assets 100
x. Advances covered by DICGC / ECGC (only for amount covered
by DICGC /ECGC not for entire amount outstanding)
50
xi. Advances for term deposits, Life policies, NSCs, IVPs and KVPs
where adequate margin is available
0
subject to
adequate
margin
xii. Loans to Staff of banks, which are fully covered by
superannuation benefits and mortgage of flat / house
20
IV. MONEY AT CALL AND SHORT NOTICE 20
V. PREMISES, FURNITURE AND FIXTURE 100
VI. OTHER ASSETS

i) Interest Due on Govt. Securities
0
ii)Accrued Interest on CRR, if any
0
iii ) Accrued Interest on loans &
advances
100
iV ) Overdue Interest Reserve
0
V ) Accrued Interest on FD with bank
20
Vi) )All Other Assets (including branch adjustments, non-banking
assets, etc.)
100
VIII. MARKET RISK ON OPEN POSITIONS
-
i. Market Risk on Foreign Exchange Open Position
(For Authorized Dealers only)
100
ii. Market Risk on Gold Open Position
100



ANALYSIS AND INTERPRETATION OF DATA

Financial Analysis:
Financial analysis is the analysis of financial statement of a company to assess
its financial health and soundness of its management. Financial statement analysis
involves a study of the financial statements of a company to ascertain its prevailing
state and the reasons thereof. Such a study would enable the public and the
investors to ascertain whether one company is more profitable than the other and
also to state and factors that are probably responsible.