FINANCIAL STATEMENT ANALYSIS OF KANGRA CENTRAL CO-

OPERATIVE BANK LIMITED

A
SYNOPSIS
SUBMITTED TO

ARNI UNIVERSITY, KATHGARH (INDORA)

FOR THE DEGREE OF

DOCTOR OF PHILOSOPHY
IN
COMMERCE

Supervisor Submitted by
Dr. Surya Bhushan Tiwari Priyankur Priya

DEP ARTMENT OF COMMERCE

ARNI UNIVERSITY KATHGARH, INDORA, DISTRICT
KANGRA HIMACHAL PRADESH (INDIA)
 2016
1. INTRODUCATION
The co-operative bank is a financial entity which belongs to its members, who are at
the same time the owners and the customers of their bank. Co-operative banks are
often created by persons belonging to the same local or professional community or
sharing a common interest. Co-operative banks generally provide their members with
a wide range of banking and financial services (loans, deposits, banking accounts
etc.). Co-operative banks differ from stockholder banks by their organization, their
goals, their values and their governance. In most countries, they are supervised and
controlled by banking authorities and have to respect prudential banking regulations,
which put them at a level playing field with stockholder banks. Depending on
countries, this control and supervision can be implemented directly by state entities or
delegated to a co-operative federation or central body.

Co-operative banking is retail and commercial banking organized on a co-operative

basis. Co-operative banking institutions take deposits and lend money in most parts of
the world. Co-operative banking, includes retail banking, as carried out by credit
unions, mutual savings and loan associations, building societies and co-operatives, as
well as commercial banking services provided by manual organizations (such as co-
operative federations) to co-operative businesses.

The structure of commercial banking is of branch-banking type; while the co-

operative banking structure is a three tier federal one.

 A State Co-operative Bank works at the apex level (ie. works at state level).
 The Central Co-operative Bank works at the Intermediate Level. (ie. District
Co-operative Banks ltd. works at district level)
 Primary co-operative credit societies at base level (At village level)
2. FEATURES OF CO-OPERATIVE BANKS

Even if co-operative banks organizational rules can vary according to their

respective National legislations, co-operative banks share common features as
follows:

2.1Customer-owned entities

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 In a co-operative bank, the needs of the customers meet the needs of the owners,
as co-operative bank members are both. As a consequence, the first aim of a co-
operative bank is not to maximize profit but to provide the best possible products and
services to its members. Some co-operative banks only operate with their members
but most of them also admit non-member clients to benefit from their banking and
financial services.

2.2 Democratic member control

Co-operative banks are owned and controlled by their members, who

democratically elect the board of directors. Members usually have equal voting
rights, according to the co-operative principle of “one person, one vote”.

2.3 Profit allocation

In a co-operative bank, a significant part of the yearly profit, benefits or surplus

is usually allocated to constitute reserves. A part of this profit can also be distributed
to the co-operative members, with legal or statutory limitations in most cases. Profit
is usually allocated to members either through a patronage dividend, which is related
to the use of the co-operative’s products and services by each member, or through an
interest or a dividend, which is related to the number of shares subscribed by each
member.

Co-operative banks are deeply rooted inside local areas and communities. They are
involved in local development and contribute to the sustainable development of their
communities, as their members and management board usually belong to the
communities in which they exercise their activities. By increasing banking access in
areas or markets where other banks are less present, farmers in rural areas, middle or
low income households in urban areas - co-operative banks reduce banking exclusion
and foster the economic ability of millions of people. They play an influential role on
the economic growth in the countries in which they work in and increase the
efficiency of the international financial system. Their specific form of enterprise,
relying on the above mentioned principles of organization, has proven successful both
in developed and developing countries.

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3. AN OVER VIEWS OF THE HISTORY OF CO-OPERATIVE
BANKS IN INDIA
For the co-operative banks in India, co-operatives are organized groups of people
and jointly managed and democratically controlled enterprises. They exist to serve
their members and depositors and produce better benefits and services for them.

Professionalism in co-operative banks reflects the co-existence of high level of

skills and standards in performing, duties entrusted to an individual. Co-operative
bank needs current and future development in information technology. It is indeed
necessary for cooperative banks to devote adequate attention for maximizing their
returns on every unit of resources through effective services. Co-operative banks have
completed 100 years of existence in India. They play a very important role in the
financial system. The cooperative banks in India form an integral part of our money
market today. Therefore, a brief resume of their development should be taken into
account. The history of cooperative banks goes back to the year 1904. In 1904, the co-
operative credit society act was enacted to encourage co-operative movement in India.
But the development of cooperative banks from 1904 to 1951 was the most
disappointing one.

The first phase of co-operative bank development was the formation and
regulation of cooperative society. The constitutional reforms which led to the passing
of the Government of India Act in 1919 transferred the subject of “Cooperation” from
Government of India to the Provincial Governments. The Government of Bombay
passed the first State Cooperative Societies Act in 1925 “which not only gave the
movement, its size and shape but was a pace setter of co-operative activities and
stressed the basic concept of thrift, self-help and mutual aid.” This marked the
beginning of the second phase in the history of Co-operative Credit Institutions.

There was the general realization that urban banks have an important role to play
in economic construction. This was asserted by a host of committees. The Indian
Central Banking Enquiry Committee (1931) felt that urban banks have a duty to help
the small business and middle class people. The Mehta-Bhansali Committee (1939)
recommended that those societies which had fulfilled the criteria of banking should be
allowed to work as banks and recommended an Association for these banks. The Co-

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operative Planning Committee (1946) went on record to say that urban banks have
been the best agencies for small people in whom Joint stock banks are not generally
interested. The Rural Banking Enquiry Committee (1950), impressed by the low cost
of establishment and operations recommended the establishment of such banks even
in places smaller than taluka towns. The real development of co-operative banks took
place only after the recommendations of All India Rural Credit Survey Committee
(AIRCSC), which were made with the view to fasten the growth of co-operative
banks.

The co-operative banks are expected to perform some duties, namely, extend all
types of credit facilities to customers in cash and kind, advance consumption loans,
extend banking facilities in rural areas, mobilize deposits, supervise the use of loans
etc. The needs of co-operative bank are different. They have faced a lot of problems,
which has affected the development of co-operative banks. Therefore it was necessary
to study this matter.

The first study of Urban Co-operative Banks was taken up by RBI in the year
1958-59. The Report published in 1961 acknowledged the widespread and financially
sound framework of urban co-operative banks; emphasized the need to establish
primary urban co-operative banks in new centres and suggested that State
Governments lend active support to their development. In 1963, Varde Committee
recommended that such banks should be organised at all Urban Centers with a
population of 1 lakh or more and not by any single community or caste. The
committee introduced the concept of minimum capital requirement and the criteria of
population for defining the urban centre where UCBs were incorporated.

4. RBI POLICIES FOR CO-OPERATIVE BANKS

The RBI appointed a high power committee in May 1999 under the chairmanship
of Shri. K. Madhava Rao, Ex-Chief Secretary, Government of Andhra Pradesh to
review the performance of Urban Co-operative Banks (UCBs) and to suggest
necessary measures to strengthen this sector. With reference to the terms given to the
committee, the committee identified five broad objectives:

 To preserve the co-operative character of UCBs

 To protect the depositors’ interest
 To reduce financial risk

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  To put in place strong regulatory norms at the entry level to sustain the
operational efficiency of UCBs in a competitive environment and evolve
measures to strengthen the existing UCB structure particularly in the context
of ever increasing number of weak banks
 To align urban banking sector with the other segments of banking sector in the
context of application or prudential norms in to and removing the irritants of
dual control regime
 RBI has extended the Off-Site Surveillance System (OSS) to all non-
scheduled urban co-operative banks (UCBs) having deposit size of Rs. 100
Crores and above.
4.1Types of Co-operative Banks

The co-operative banks are small-sized units which operate both in urban and non-
urban centres’. They finance small borrowers in industrial and trade sectors besides
professional and salary classes. Regulated by the Reserve Bank of India, they are
governed by the Banking Regulations Act 1949 and banking laws (co-operative
societies) act, 1965. The co-operative banking structure in India is divided into
following 5 components:

a) Primary Co-operative Credit Society: The primary co-operative credit

society is an association of borrowers and non-borrowers residing in a
particular locality. The funds of the society are derived from the share capital
and deposits of members and loans from central co-operative banks. The
borrowing powers of the members as well as of the society are fixed. The
loans are given to members for the purchase of cattle, fodder, fertilizers,
pesticides, etc.
b) Central co-operative banks: These are the federations of primary credit
societies in a district and are of two types those having a membership of
primary societies only and those having a membership of societies as well as
individuals. The funds of the bank consist of share capital, deposits, loans and
overdrafts from state co-operative banks and joint stocks. These banks provide
finance to member societies within the limits of the borrowing capacity of
societies. They also conduct all the business of a joint stock bank.
c) State co-operative banks: The state co-operative bank is a federation of
central co-operative bank and acts as aWatch dog of the co-operative banking

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 structure in the state. Its funds are obtained from share capital, deposits, loans
and overdrafts from the Reserve Bank of India. The state cooperative banks
lend money to central co-operative banks and primary societies and not
directly to the farmers.
d) Land development banks: The Land development banks are organized in 3
tiers namely; state, central, and primary level and they meet the long term
credit requirements of the farmers for developmental purposes. The state land
development banks oversee, the primary land development banks situated in
the districts and tehsil areas in the state. They are governed both by the state
government and Reserve Bank of India. Recently, the supervision of land
development banks has been assumed by National Bank for Agriculture and
Rural development (NABARD). The sources of funds for these banks are the
debentures subscribed by both central and state government. These banks do
not accept deposits from the general public.
e) Urban Co-operative Banks: The term Urban Co-operative Banks (UCBs),
though not formally defined, refers to primary co-operative banks located in
urban and semi-urban areas. These banks, till 1996, were allowed to lend
money only for non-agricultural purposes. This distinction does not hold
today. These banks were traditionally centred on communities, localities, work
place groups. They essentially lend to small borrowers and businesses. Today,
their scope of operations has widened considerably.
The origins of the urban co-operative banking movement in India can be
traced to the close of nineteenth century. Inspired by the success of the
experiments related to the cooperative movement in Britain and the co-
operative credit movement in Germany, such societies were set up in India.
Co-operative societies are based on the principles of cooperation, mutual help,
democratic decision making, and open membership. Cooperatives represented
a new and alternative approach to organization as against proprietary firms,
partnership firms, and joint stock companies which represent the dominant
form of commercial organization. They mainly rely upon deposits from
members and non-members and in case of need, they get finance from either
the district central co-operative bank to which they are affiliated or from the
apex co-operative bank if they work in big cities where the apex bank has its

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 Head Office. They provide credit to small scale industrialists, salaried
employees, and other urban and semi-urban residents.
5. FUNCTIONS OF CO-OPERATIVE BANKS
 Co-operative banks also perform the basic banking functions of banking but
they differ from commercial banks in the following respects
 Commercial banks are joint-stock companies under the companies’ act of
1956, or public sector bank under a separate act of a parliament whereas co-
operative banks were established under the co-operative society’s acts of
different states.
 Commercial bank structure is branch banking structure whereas co-
operativebanks have a three tier setup, with state co-operative bank at apex
level, central / district co-operative bank at district level, and primary co-
operative societies at rural level.
 Only some of the sections of banking regulation act of 1949 (fully applicable
to commercial banks), are applicable to co-operative banks, resulting only in
partial control by RBI of co-operative banks.
 Co-operative banks function on the principle of cooperation and not entirely
on commercial parameters.
6. PROBLEMS OF CO-OPERATIVE BANKS

However, concerns regarding the professionalism of urban co-operative banks gave

rise to the view that they should be better regulated. Large co-operative banks with
paid-up share capital and reserves of Rs.1 lakh were brought under the purview of the
Banking Regulation Act 1949 with effect from 1st March, 1966 and within the ambit
of the Reserve Bank’s supervision. This marked the beginning of an era of duality of
control over these banks. Banking related functions (viz. licensing, area of operations,
interest rates etc.) were to be governed by RBI and registration, management, audit
and liquidation, etc. governed by State Governments as per the provisions of
respective State Acts. In 1968, UCB’s were extended the benefits of deposit
insurance.

Towards the late 1960s there was debate regarding the promotion of the small scale
industries. UCB’s came to be seen as important players in this context. The working
group on industrial financing through Co-operative Banks, (1968 known as

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DamryGroup) attempted to broaden the scope of activities of urban co-operative
banks by recommending these banks should finance the small and cottage industries.
This was reiterated by the Banking Commission in 1969.

The Madhavdas Committee (1979) evaluated the role played by urban co-operative
banks in greater details and drew a roadmap for their future role recommending
support from RBI and Government in the establishment of such banks in backward
areas and prescribing viability standards.

The Hate Working Group (1981) desired better utilization of bank’s surplus funds and
that the percentage of the Cash Reserve Ratio (CRR) & the Statutory Liquidity Ratio
(SLR) of these banks should be brought at par with commercial banks, in a phased
manner. While the Marathe Committee (1992) redefined the viability norms and
ushered in the era of liberalization, the Madhava Rao Committee (1999) focused on
consolidation, control of sickness, better professional standards in urban co-operative
banks and sought to align the urban banking movement with commercial banks.

A feature of the urban banking movement has been its heterogeneous character and its
uneven geographical spread with most banks concentrated in the states of Gujarat,
Karnataka, Maharashtra, and Tamil Nadu. While most banks are unit banks without
any branch network, some of the large banks have established their presence in many
states when at their behest multi-state banking was allowed in 1985. Some of these
banks are also Authorized Dealers in Foreign Exchange.

7. Concept of Financial Performance Analysis: An Over Views

In the financial performance analysis the performance of the institution is judged
through financial aspect. Financial Performance in itself is a broader term. It explains
about the performance of the institution in recent years as compared to the past years.
Financial performance analysis is the process of determining the financial strengths
and weakness of the institution by establishing strategic relationship between the
items of the balance sheet, profit and loss account and other operative data. It can also
be called as a process of evaluating its position in the years passed and its purpose is
to diagnose the information contained in financial statements so as to judge the
profitability and financial soundness of the company. Just like a doctor examines his
patient by recording his body temperature, blood pressure etc. Before making his
conclusion regarding the illness and before giving his treatment, in the same way a

9
financial condition of the company .It is important to bring out the mystery behind the
figures in financial statements.

8. AN OVER VIEWS OF THE KANGRA CENTRAL CO

OPERATIVE BANK LTD.

The Kangra central Cooperative Bank came into existence on 17th March
1920 (License No. RPCD.09/2009-10). Then Indora Banking Union was merged and
2nd Branch of the Bank opened at Nurpur in Jan’1956, after that Palampur Banking
Union was merged and 3rd Branch of the Bank opened at Palampur in Jan’1957 and
Nanaon Banking Union was merged and 4th Branch of the Bank opened at Hamirpur
in Oct’1958.

The Bank suffered losses because of the partition in 1947 to the tune of Rs.10.64 Lacs

In Mar 1962, the bank suffering from the setback of partition was granted Rs.4.09
Lacs by the Govt.Govt also provided Interest Free Relief Loan of Rs.3.98 Lacs and
Govt of India Loan of Rs.4.97 Lacs @ 3.87% in 1962 In 1971-72

The Bank entered into the deposit mobilisation scheme of Pong Dam Area
aggressively and secured maximum share of Deposit Bank Deposits increased from
Rs. 256 Lacs in 1971-72 to Rs. 1054 Lacs in 1973-74. After that Bank grows very fast
year by year and at present it is the best one among all the co-operative banks works
in Himachal Pradesh. Now there are 208 branches of Kangra central co-operative
bank in five Districts of Himachal Pardesh which provides the best banking facilities
to the people of Himachal Pradesh. At present Mr. JagdishSapehia is the Chairman of
the Kangra Central Co Operative Bank Ltd.

8.1 Significance of the Study

Financial statement analysis of Kangra Central Co-operative Bank Ltd. (KCCBL) is

the study related with the past financial performance of this bank. This study work
will mainly base on the previous 15 annual reports of the KCCBL and various
publications of RBI. The study is done to know about the past performance of the
bank, to know about the growth of the Bank. The purpose of the study is to analyse
the previous financial statements of the bank and to know about the performance of
the bank in the past years.

8.2 Financial Statement Analysis

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Financial Statement Analysis can also be termed as Performance evaluation since the
performance of the company is judged through financial aspect. Financial Statement
Analysis in itself is a broader term. It explains about the performance of the Bank in
recent years as compared to the past years. Financial Statement Analysis is the
process of determining the financial strengths and weakness of the company/
institution by establishing strategic relationship between the items of the balance
sheet, profit and loss account and other operative data. It can also be called as a
process of evaluating its position in the years passed and its purpose is to diagnose the
information contained in financial statements so as to judge the profitability and
financial soundness of the company. Just like a doctor examines his patient by
recording his body temperature, blood pressure etc. Before making his conclusion
regarding the illness and before giving his treatment, in the same way a financial
condition of the company .It is important to bring out the mystery behind the figures
in financial statements.

9. FINANCE

Finance is the process of conversion of accumulated funds to productive use. It is

commonly known as the service of money. It includes determining what has to be
paid for raising funds to the best uses.

Finance guides and regulates investment decision and expenditure. The expenditure
decisions may pertain to recurring expenditure or they may be about capital
expenditure programmes or capital budgeting. The encyclopaedia Britannica defines
finance as “the act of providing the means of payments”.

9.1 Financial Statements

A financial statement is a collection of data organized according to logical and

consistent accounting procedures. Its purpose is to convey an understanding of some
financial aspects of a business firm. It may show a position at a moment in time, as in
the case of a balance sheet, or may reveal a series of activities over a given period of
time, as in the case of income statement.

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10.VARIOUS METHODS USED FOR FINANCIAL STATEMENT
ANALYSIS OF THE ORGANIZATION
A number of methods are used for the analysis the relationship between different
statements. An effort is made and a base is as per the availability of data to select the
device/tool for analysis. The different methods used for analysis are as follows:

8.1 Comparative Statements

8.2 Trend Analysis
8.3 Cash flow analysis
8.4 Ratio Analysis etc..,

All these methods are used for the analysis of financial performance of the
organization.

8.1 Comparative Statements

The comparative balance sheet analysis is the study of the trend of the same items,
group of items and computed items in two or more balance sheets of the same
business enterprise on different dates. The changes in periodic balance sheet items
reflect the conduct of a business. The changes can be observed by comparison of the
balance sheet at the beginning and at the end of a period and these changes can help in
forming an opinion about the progress of an enterprise. The comparative balance
sheet has two columns for the data of original balance sheets. A third column is used
to show increases in figures. The fourth column may be added for giving percentages
of increases or decreases.

8.2 Trend Analysis

The financial statements may be analysed by computing trends of series of

information. This method determines the direction upwards or downwards and
involves the computation of the percentage relationship that each statement item bears
to the same item in base year. The information for a number of years is taken up and
one year, generally the first year, is taken as a base year. The figures of the base year
are taken as 100 and trend ratios for others years are calculated on the basis of base
year. The analyst is able to see the trend of figures, whether upward or downward.

8.3 Cash flow analysis

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Cash flow statement is a statement which describes the inflows (sources) and outflows
(uses) of cash and cash equivalents in an enterprise during a specified period of time.
Such a statement enumerates net effects of the various business transactions on cash
and its equivalents and takes into account receipts and disbursements of cash. A cash
flow statement summarises the causes of changes in cash position of a business
enterprise between dates of two balance sheets. According to AS-3 (Revised), an
enterprise should prepare a cash flow statement and should present it for each period
for which financial statements are prepared.Classification of Cash Flows.

a) Cash flows from operating activities

bCash Flows from investing activities

c) Cash flows from financing activities

a) Cash flows from operating activities

Operating activities are the principal revenue-producing activities of the enterprise

and other activities that are not investing or financing activities.

b) Cash Flows from investing activities:

Investing activities are the acquisition and disposal of long term assets and other
investments not included in cash equivalents. The separate disclosure of cash flows
arising from investing activities is important because the cash flows represent the
extent to which expenditures have been made for resources intended to generate
future income and cash flows.

c) Cash flows from financing activities:

Financing activities are activities that result in changes in the size and composition of
the owner’s capital (including preference share capital in the case of a company) and
borrowings of the enterprise.

9. RATIO ANALYSIS
9.1 Meaning of Ratio

A ratio is a simple arithmetical expression of the relationship of one number to

another. It may be defined as the indicated quotient of two mathematical expressions.
According to Accountant’s Handbook by WinonKell and Bedford a ratio, is an
expression of the quantitative relationship between two numbers”.

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 9.2 Meaning of Ratio Analysis

Ratio Analysis is a widely used tool of financial analysis. It is defined as the

systematic use of ratios to interpret the financial statements so that the strengths and
weakness of a firm as well as its historical performance and current financial
condition can be determined. The rationale of ratio analysis lies in the fact that it
makes related information comparable. A single figure in itself has no meaning but
when expressed in terms of a related figure, it yields significant inferences.

Advantage of Ratio Analysis

 It is important to present the facts on a comparative basis and enables the

drawing of inferences regarding the performance of the firm.
 It is important to draw the conclusions regarding the liquidity position of the
firm.
 It is useful for assessing the long-term financial viability of a firm.
 It helps to operate the efficiency in the management and utilization of its
assets.
 It helps to find out the overall profitability of the firm.
 It is important to make a inter-firm comparison study.
 It enables to know whether the financial position of a firm is improving or
deteriorating over the years.

Limitations of Ratio Analysis

Though ratio analysis is a widely used tool of financial analysis, it suffers from
certain limitations. These are as follows:

 There is limited use of single ratio.

 It inherits limitations of accounting.
 It cannot explain the price level changes.
 There is no substitute for ratios i.e., if it is separated from the statements from
which it are computed, it becomes useless.
 As ratio analysis is primarily a quantitative analysis and not a qualitative
analysis, ratios devoid of absolute figures prove distortive.
 A change of accounting procedures often makes the ratio analysis misleading.

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  There is a personal bias in ratio analysis as different people interpret in a
different way.

Nature of Ratio Analysis

 Selection of relevant data from the financial statement depending upon the
objectives of the analysis.
 Calculation of appropriate ratios from the above data.
 Comparison of the calculated ratios with the ratios of projected financial
statements.
 Interpretation of the ratios.
10. ECONOMIC VALUE ADDED: An Over Views

EVA, or economic value added, is a special way to measure profit that is better than
all others. It measures "economic profit" as opposed to accounting profit. It is
measured after deducting the full '"opportunity" cost of all the capital invested in
business assets. It doesn't measure profit until all investors, shareholders included,
have earned a minimum return for bearing risk. EVA, in short, turns the balance sheet
into another charge to earnings, just like cost of goods sold.As a result, managers
aiming to increase EVA naturally look for ways to purge capital from non-productive
assets and activities. They turn working capital faster and speed asset turns. They
exit losers earlier, sell assets worth more to others, and outsource to more capable
suppliers. They invest capital sparingly and imaginatively to meet business goals and
only with the conviction they can earn above the cost. There is true accountability for
capital. But also, and this is key, they aggressively invest in allgrowth that adds value
by earning above the cost of capital. With EVA, managers aren't hung up on milking
margins and returns from profitable lines that should grow faster. The point is, EVA
gives all the right insights into making decision tradeoffs, and it replaces a whole
bunch of conventional metrics -- from sales and earnings growth to ROI and margin,
even cash flow -- with a simple focus on increasing economic profit.EVA is also
typically measured after correcting other accounting distortions. For example, leased
assets are treated as if owned, innovation and brand spending are written off over time
instead of expensed, and restructuring costs are considered to be investments that add
to balance sheet capital. The result: EVA encourages managers to make better, more
economically rational decisions instead of letting accounting rules cloud their

15
business judgment. They don't cut R&D just to make a near term earnings goal, and
they restructure whenever it is economic to do so.

EVA's most important property is the present value of a forecast for EVA is always
identical to the net present value of the projected cash flows – because EVA sets aside
the profit that must be earned to recover the capital that has been or will be
invested. If EVA is zero, NPV is zero, and if EVA is positive then a positive
"franchise value" is created. In practice, this means that CFOs can use EVA with all
the confidence they would attach to discounted cash flow, for they yield the same
answer for a given plan or projection. But more than that, it means CFOs (and
securities analysts) should dispense with discounted cash flow analysis, and instead
value all projects, plans and acquisitions by projecting and discounting EVA. Not
only is this simpler and more consistent, but EVA can be used both as a measure of
value and a measure of performance, where cash flow cannot. EVA is also
analytically superior. It renders more reliable and more penetrating insights than any
other financial analysis framework because of a recent breakthrough by EVA
Dimensions.

The EVA concept is often called Economic Profit (EP) to avoid problems caused by
the trade marking. EVA is popular and well known that all residual income concepts
are often called EVA even though they do not include the main elements defined by
Stern Stewart & Co. Up to 1970, residual income did not get wide publicity and it was
not the prime performance measure for companies. However, in the 1990’s, the
creation of shareholder value has become recognised as the ultimate economic
purpose of a corporation. Firms focus on building, operating and harvesting new
businesses and/or products that will provide a greater return than the firm’s cost of
capital, thus ensuring maximisation of shareholder value. EVA is a strategy
formulation and a financial performance management tool that helps companies make
a return greater than the firm’s cost of capital. Firms adopt this concept to track their
financial position and to guide management decisions regarding resource allocation,
capital budgeting and acquisition analysis.

10.1 Uses of EVA

EVA examines three fundamental principles of value creation related to Cash Flow,
Risk and sustainability of return, it has distinct applications. They are

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  To measure a bank’s historical success in creating values
 To determine how bank’s stock will perform in the future
 To examine the excess returns in future and its impact on the value of the
bank
 To calculate an intrinsic value of a stock by discounting future value of
EVAs
 To analysing the equity securities.

The Economic Value Added (EVA) is a measure of surplus valuecreated on an

investment.It define the return on capital (ROC) to be the “true” cash flow return on

Capitals earned on an investment and define the cost of capital as the weighted
average of the costs of the different financing instruments used to finance the
investment.

EVA = (Return on Capital - Cost of Capital) (Capital Invested in Project)

11. REVIEW OF LITERATURE

Af-Tamini and Iabnoun, (2006) compares service quality and bank performance
between national and foreign banks in the UAE. Also the paper compares the
importance of the dimensions of the instrument between the two sets of the banks.
The financial performance is compared using the of a Whitney non-parametric test.
The results of this study will serve as a benchmark for UAE bankers from the 800
questionnaires, 480 responses were received.

Ballabh, (2001) analyzed challenges in the post-banking sector reforms. With

globalization and changes in technology, financial markets, world over, have become
closely integrated. For the survival of the banks, they should adopt new
policies/strategies according to the changing environment.

Bhattacharyya and Phani,(2004) explains the increasing pupularity of EVA in India.

They propose that the EVA computation involves significant subjevtivity which
reduces its informative value. They state that EVA fails to reflect a positive signal to
the markets as compared to other stock performance indicators.

Girotra et al., (2001) emphasize that the importance of the EVA. They compare the
EVA withReturn on Equity (ROE), Return on Net worth (RONW), Return on Capital
Employed (ROCE) andEarnings per Share (EPS). They argue that EVA is not a tool

17
to create value but it encouragesmanagers to think like owners, and, in the process
may impel them to strive for better performance. Thestudy concluded that EVA has
been helpful because it forces companies to pay attention to capitalemployed and
especially to excess working capital.

Kaveri,(2001) studied the non-performance assets of the various banks and suggested
various strategies to reduce the extent of NPAs. In view of the steep rise in fresh NPA
advances, credit should be strengthening. RBI should use some new policies/strategies
to prevent NPAs.

Kumar, (2006) studied the bank nationalization in India marked a paradigm shift in
the focus of banking as it was intended to shift the focus from class banking to mass
banking. Internationally also efforts are being made to study causes of financial
inclusion and designing strategies to ensure financial inclusion of the poor
disadvantaged. The banks also need to redesign their business strategies to incorporate
specific plans to promote financial inclusion of low income group treating it both a
business opportunity as well as a corporate social responsibilities. Financial inclusion
can emerge as commercial profitable business.

Laxman, Deen and Badiger, (2008) examined that banking industry is undergoing a
paradigm shift in scope, content, structure, functions and governance. Their very
characters, composition, contour and chemistry is changing. The information and
communication technology revolution is radically and perceptibly changing the
operational environment of the banks.

Mittal.(2008) investigate relationship between EVA implementation and development

inthe financial efficiency of a company. Godrej Consumer Products Limited, a
leading fast movingconsumer goods company in India, is investigated. After EVA
implementation, they interpret thesituation of the company by using SWOT analysis.

Muniappan, (2002) studied paradigm shift in banks from a regulator point of view. He
concluded the positive effect of banking sector reforms on the performance of banks.
He suggested many effective measures to strengthen the Indian banking system. The
reduction of NPAs, more provisions for standards of the banks, IT, sound capital bare
are the positive measures for a paradigm shift. A regulatory change is required in the
Indian banking system.

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Nair, (2006) discusses the future challenges of technology in banking. The author also
point out how IT poses a bright future in rural banking, but is neglected as it is
traditionally considered unviable in the rural segment. A successful bank has to be
nimble and agile enough to respond to the new market paradigm and ineffectively
controlling risks. Innovation will be the key extending the banking services to the
untapped vast potential at the bottom of the pyramid.

Popa, (2009) claims that EVA can be an important tool that bankers can use to
measure and improve the financial performance of their bank. They emphasize the
advantages of EVA by comparing to other performance indicators. Since EVA takes
the interest of the bank’s shareholders into consideration, the use of EVA by bank
management may lead to different decisions than if management relied solely on other
measures. They investigate the Romanian Banking systems to compare the
advantages of EVA to other measures of bank performance such as return on assets
(ROA), return on equity (ROE), net banking income and the efficiency ratio, which
do not consider the cost of equity capital employed.

Singh, (2003) analysed profitability management of banks under the deregulated

environment with some financial parameters of the major four bank groups i.e. public
sector banks, old private sector banks, new private sector banks and foreign banks,
profitability has declined in the deregulated environment. He emphasized to make the
banking sector competitive in the deregulated environment. They should prefer non-
interest income sources.

Singla,(2008) examines that how financial management plays a crucial role

industrialists growth of banking. It is concerned with examining the profitability
position of the selected sixteen banks of banker index for a period of six years (2001-
06). The study reveals that the profitability position was reasonable during the period
of study when compared with the previous years. Strong capital position and balance
sheet place. Banks in better position to deal with and absorb the economic constant
over a period of time.

Shroff, (2007) gives a summary of how Indian banking system has evolved over the
year. The paper discusses some issues face by these systems. The author also gives
examples of comparable banking system for other countries and the lesson learnt.
Indian banking is at the threshold of the paradigm shift. The application of technology

19
and product innovations is bringing about structure change in the Indian banking
system.

Subbaroo, (2007) concludes the Indian banking system has undergone transformation
itself from domestic banking to international banking. However, the system requires a
combination of new technologies, well-regulated risk and credit appraisal, treasury
management, product diversification, internal control, external regulations and
professional as well as skilled human resource to achieve the heights of the
international excellence to play its role critically in meeting the global challenge. This
paper mainly concentrates on the major trends that change the banking industry world
over, viz. consolidation of players through mergers and acquisitions globalization of
players, development of new technology, universal banking and human resource in
banking, profitability, rural banking and risk management. Banks will have to gear up
to meet stringent prudential capital adequacy norms under Basel I and II, the free
trade agreements. Banks will also have to cope with challenges posed by
technological innovations in banking.

Tiwari, (2005) proposed a view that among the financial intermediaries banks and
financial institutions are vital players in running the funding activities of the
industries. In the bank based system the financial institutions dominate in the
aggregate assets of the financial system while in market based system, equity market
has largest share of assets in the aggregate assets of the financial system.

Uppal and Kaur ,(2007) analysis the efficiency of all the bank groups in the post
banking sector reforms era. Time period of study is related to second post banking
sector reforms (1999-2000 to 2004-05). The paper concludes that the efficiency of all
the bank groups has increased in the second post banking sector reforms period but
these banking sector reforms are more beneficial for new private sector banks and
foreign banks. This paper also suggests some measures for the improvement of
efficiency of Indian nationalized banks. The sample of the study in Indian banking
industry which comprises five different ownership groups and the ratio method is
used to calculate the efficiency of different bank groups. New private sector banks are
compelling with foreign banks for continuous improvement in their performance.

Vashisht, (2004) studied recent global developments, which has transformed the
environment in which commercial banks operate. Globalization has expanded

20
economic interdependence and interaction of countries greatly. Under the regime of
globalized environment, the financial performance of the commercial banks has
changed and the commercial banks will face new challenge and also new
opportunities in the coming years.

Verma, (2000) examines an appropriate way of evaluating bank’s performance and

also find out which Indian banks have been able to create shareholders wealth since
1996-1997 to 2000-2001 with the help of EVA and MVA (Market Value Added)
which tell what the insitution is doing with investor’s hard earned money.

12.FOCUS OF THE PROBLEM:

The study on financial statement analysis of Kangra Central Co-operative Bank Ltd.
is done on the basis of past 15 years annual reports of theKangra Central Co-operative
Bank and various publications and annual reports of Reserve Bank of India.

Tools uses in the study of financial statement analysis of Kangra Central Co-
operative Bank Ltd. areTrend analysis, Vertical analysis, Horizontal analysis,
Economic Value Added and ratio analysis. On the basis of this analysis the financial
statements of the Kangra Central Co-operative Bank Ltd. will be evaluated.

13.OBJECTIVES
a. To study and compare the financial growth of KCCBL.
b. Tostudy the financial strengths and weaknesses of KCCBL.
c. To study the financial performance of the KCCBL.
d. To analyse and compare EVA as a tool for measuring the performance of
KCCBL.
e. ToProvide the set of suggestions for the appropriate policy measures to improve
the efficiency of theKCCBL.
14.HYPOTHESIS
a. The financial performance of the KCCBL is good as compared with other
cooperative banks in the state of Himachal Pradesh.
b. The financial performance of KCCBL is not good as compared with Industry
standards.
c. The bank is not using EVA tool properly for measuring its financial
performance.

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15. RESEARCHMETHODOLOGY&RESEARCH DESIGN

The research frame for the study is detailed below. While conducting this research
uses secondary data. In order to facilitate the presentation this chapter is divided into
following section:

 Selection Method

 Universe

 Sample size

 Collection of data

o Primary sources

o Secondary sources

 Analysis of data

 Diagrammatic presentation

 Selection of method:

A performance analysis method is adopted to carry out the research in which data is
collected.

 Universe:

All the items under consideration in any field of inquiry constitute a ‘Universe’. The
relevant universe in this case is Himachal Pradesh and it consisted of the Head office
of Kangra Central Co Operative Bank at Dharmshala.

 Sample Size:

The study is basically is done on secondary data so thus no need to take any simple
size.

 Data Collection:

While conducting this research I have mainly used secondary data.

Secondary sources are:

Following are the sources which were helpful in research.

 Annual reports of Kangra Central Co-operative Bank.

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 Various publications of RBI.

 Bank website.

 Various articles on banking.

 Newspapers.

 Magazines.

 Diagrammatic presentation:

Results were interpreted and discussion was done. The tabulated data was then
represented diagrammatically in the forms of pie or bar diagrams.

TAYPES OF DATA

There is basically second hand information collected from following sources:

 Annual reports of Kangra Central Co-operative Bank.

 Various publications of RBI.

 Bank website.

 Various articles on banking.

 Magazines.

15. TOOLS FOR DATAANALYSIS

The analysis of Financial Statement of KCCBLbased on various financial ratios.

Statistical tests like ANOVAetc.also beapplied in the research process.

16. THE TATETIVES CHAPTER PLAN

Chapter 1.
Introductory and Theoretical Frame work of study.
Chapter 2.
Kangra Central Co-Operative Bank Limited: A Regulatory and Financial Framework
Chapter 3.
Review of literature
Chapter 4.
Financial Statement Analysis Of Kangra Central Co-Operative Bank Limited: Testing
of hypothesis and analysis of data

23
Chapter 5.
Findings, Conclusion and Recommendations

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