Financial Performance

Analysis o f Select Banks

 inancial Analysis is a process o f synthesis and sum m arization o f financial

F and operative data w ith a view to getting an insight into the operative
activities o f a business enterprise. By establishing strategic relationships between
the com ponents o f the Balance Sheet and profit and loss A ccount and other
operative data, it unveils the m eaning and significance o f the various items
em bodied in the financial statements-the financial blue prints’ - o f a business
concern (W essel, 1961). Financial Analysis consists o f com parisons for the same
com pany over periods o f tim e and/or com parisons o f different com panies either
in the same industry or in different industries. It may be done for a variety o f
purposes, w hich may range from a simple analysis o f the short term liquidity
position o f the firm to a comgrehensive assessm ent o f the strengths and
weaknesses o f the firm in various areas. It is helpful in assessing corporate
excellence, judging credit w orthiness, forecasting bond ratings, predicting
bankruptcy and assessing m arket risk. The financial analysis can be perform ed
by analysts w ho w ork for the firm or by outsiders like investors creditors,
lenders, suppliers, customers, security analysts, academics, re. searchers,
environm ental protection organizations, governm ent and other regulatory bodies,
special interest lobbying groups and so on. So the financial analysis, which aims
at m easuring the perform ance o f the organization is intended for both.(a) for
internal use by m anagem entjand (b) for external use by external parties. Exhibit

5.1 list?the parties w ho are interested in the financial statem ent analysis, their
focus o f interests and purposes o f analysis; and the nature o f the infom (ation that
they need for taking their decisions. Shareholders and potential investors use the
analysis for investm ent decision purposes; lenders, and suppliers have an interest
to know w hether the com pany can pay back the amount they lend or supply;
custom ers are interested in the com pany’s ability to sustain so that their
warranty, guarantee and quality o f products is ensured; em ployees are interested
in know ing the position o f the com pany so that their salary, retirement benefits,
and other incentives and benefits are not in jeopardy; the security analysts focus c.n knowing
E xhibit 5.1
T arget A udience for Financial Statem ent A nalysis
S. Interested Parties Purpose for which information is Required Type of informat'on Required
No.
1. Shareholders and (a) Investment focus: For Investment decisions, i.e. Risk, return, divider d yield
Potential investors which Shares to buy, retain or sell? At which time liquidity and so on. The share
should such transactions be made? holders want to predict the timing,
(b) Stewardship focus: How does management use amounts &uncertainties of future
resources under its control? Is the capacity fully cash flows of the firm.
utilised. Sustainability of cash flows
earnings, etc.
2. Lenders and Do they get back their money in time? What are the Short-term and lone;-term liquidity
Suppliers prospects of the firm? and profitability.
3. Customers Customers have a vested interest in monitoring the Profitability, liquidity, tBfficiency
financial viability of firms with which they have long­ with which resources are put to
term relationships e.g. guarantees, warrantees, use.
deferred benefits, etc.
4. Security analysts They help shareholders, investors, lenders and Risk, return, sustainability of cash
auditors. The focus of their attention varies flows, efficient management of
depending upon the needs of their clients. resources, etc.
5. Government/other Revenue raising "{direct and indirect taxes), All such information that may help
government contract (cost plus information), In ascertaining and maintaining
regulatory bodies
regulatory intervention (whether to provide a loan good health of the capital market
guarantee to a financially distressed firm), equitable and the economy th ough good
resource allocation, etc. corporate qovernaocj.
Employees have a vested interest in the continued Production, profits, liquidity,
6. Employees
and profitable operations of the firm. In the long­ solvency, and stability.
term, they are interested in pension, stock option,
payment of retirement benefits, etc. In the short­
term, their focus of attention would be bonus,
incentive schemes, etc.
Managers need financial statement information for Information for ca| al structure
7. Management
financial, investment, dividend and operating planning, investmt nt decisions,
decision. They also need to estimate the linkages dividend decision, 3‘.c.
between compensation (or incentives schemes) and
financial statement variables such as earnings per
share, cash flows per share, etc.

Source: Babatosh Banerjee (2005), Financial Policy and Management Accounting, Prentice Hail: 318
 the risk and return, sustainability of company’s returns, efficient management of
resources etc. so that they can advise their clients so far as their investm ent in the
organization’s securities are concerned. Similarly, the govt, is interested to know
w hether the com pany follows the legal norms as a corporate citizen. The
m anagem ent o f the com pany uses the financial analysis in taking investment,
financing and dividend decisions, as well as use the input o f a n a ly s t in future
planning and control activities (Banerjee, 2 0 0 5 ).

T o o ls o f F in a n c ia l A n a ly sis

Just like a doctor exam ines a hum an being by measuring his body
tem perature, blood pressure and making diagnostic tests like X-Ray, ECG,USG,
etc. before m aking his conclusion regarding the illness, a financial analyst
analyses the financial statem ents w ith various tools o f analysis before
com m enting upon the financial health or illness o f an enterprise. These tools are
com parative analysis, trend analysis, com m on size analysis, fund flow analysis,
cash flow analysis and Ratio Analysis. O f all the tools, the most popular
tool/technique is Ratio Analysis.

F in a n c ia l R atio A n a ly sis
A ratio shows an arithm etical relationship between two figures. It is an
assessm ent o f the significance o f one figure in relation to the other. It takes the
form o f a quotient by dividing one figure by the other. In financial analysis, these
ratios are custom arily expressed in the form of ‘tim es’, ‘j/.voportion’,
‘percentage’, or ‘per one’. They describe the significant relationship which exists
betw een figures shown on a Balance Sheet, in a Profit & Loss a/c or 1 any other

part o f the accounting organization (Batty, 1966).

Financial ratios provide the analyst w ith a very useful tool for gleaning
inform ation from a firm ’s financial statements. The particular ratio or ratios
selected for use by the analyst depends upon the reason for pertorm ing the
analysis. For exam ple, a Com m ercial Loan Officer analyzing a loan application
w ould be interested in determ ining the ability o f the applicant to repay the loan
w hen due. In this case, the analyst would be concerned with the level o f cash
flow o f the firm in relation to its existing and proposed levels o f interest and
principal paym ents. There exist an alm ost limitless num ber o f conceivable
financial ratios that can be devised. (Bowlin, M artin & ScotL 1990). A
purposeful financial ratio analysis could lead the highlighting o f management
issues and problem s and thus aid in identifying alternative courses o f actions for
responding to such issues and problem s, and thus aid in identifying, alternative
courses o f actions for responding to such issues and problem s. Sucii issues and
problem s could give birth to find answers to the following questions:

I. w hether the profitability o f the enterprises is satisfactory,

II. w hether the enterprise’s financial condition is basically sound?
III. w hether the com pany is credit worthy;
IV. whether the capital structure o f the business is in proper alignment; &
V. w hether the com panies operations are doing well so far as turnover
is concerned.
To answer the above questions to gauge the financial perform ance o f a
com pany, various ratios over the years have been developed. These are
profitability ratios, solvency ratios, and liquidity ratios and turn over ratios

(Keown, M artin, Petty & Scott, “2002).

A b rie f description o f these ratios is given hereunder:

P ro fita b ility R a tio s

Profitability reflects the final result o f business operations. T h ;re are two

types o f profitability ratios: Profit margins ratios and rate o f return 1 itios. Profit

m argin ratios show the relationship between profit and sales. The -wo popular
profit m argin ratios are: gross profit margin ratio and net profit margii ratio. Rate
o f return ratios reflects the relationship between profit and invest.aent. The
im portant rate o f return m easures are: return on total assets, earning power, and

return on equity.
S o lv e n c y R a tio s
Financial solvency refers to the use o f debt finance. W hile debt capital is a
cheaper source o f finance, it is also a riskier source o f finance. Solvency ratios
help in assessing the risk arising from the use o f debt capital. Two types o f ratios
are com m only used to analyse financial solvency: Structural ratios and coverage
ratios. Structural ratios are based on the proportions o f debt and equity in the
financial structure o f the firm. The im portant structural ratios are: debt-equity
ratio and debt-assets ratio. Coverage ratios show the relationship between debt
servicing com m itm ents and the sources for meeting these burdens. The important
coverage ratios are: interest coverage ratio, fixed charges coverage ratio, and
debt service coverage ratio.

L iq u id ity R a tio s
Liquidity refers to the ability o f a firm to m eet its obligations in the short
run, usually one year. Liquidity ratios are generally based on the relationship
betw een current assets (The sources for m eeting short-term obli gations) and
current liabilities. The im portant liquidity ratios are: Current ratio, acid-test ratio,
and bank finance to working capital gap ratio (Chandra, Prasanna-1997).

T u rn over R a tio s
Turnover ratios, also referred to as activity ratios or asset m anagem ent
ratios, m easure how efficiently the assets are em ployed by a firm. r' hese ratios
are based on the relationship betw een the level o f activity, represented by sales or
cost o f goods sold, and levels o f various assets. The im portant turnover ratios
are: inventory turnover, average collection period, receivables turnover, fixed

assets turnover, and total assets turnover.

F in a n c ia l A n a ly sis o f B anks
So far as the financial analysis o f a bank is concerned its analysis can be
done with the help o f ratio analysis. Ratio analysis enables the m anagem ent o f
banks to identify the causes o f the changes in their advances, income, deposits,
expenditure, profits and profitability over the period o f tim e and thus help in
pinpointing the direction o f action required for increasing the deposi ts, income,
advances and reducing the expenditure and for altering the profitabili;/ prospects
o f the banks in future. To be really helpful and practically useful for vhe bankers,
the package o f ratios should be small in size, simple in calculations., logically
consistent and statistically valid. Over the years, various experts propounded a
plothora o f ratios for analyzing the financial position o f a bank S inkey (1998)
argues that the financial analysis o f a bank can be done with the help o f four
general categories o f ratios viz. profitability ratio, liquidity ratio, leverage ratio
and activity ratio.

Profitability is the m ost im portant and reliable indicator as it gives a broad

indication o f the capability o f a bank to increase its earnings. Evaluation o f
banking com panies in terms o f profitability instead o f profits is better since the
form er is obtained after purging with effect o f size variable on the absolute level
profits. It is the relative concept and indicates net profits as percentage o f
w orking funds. It serves as an index to the degree o f asset utilization and
m anagerial effectiveness by sharing the efficiency w ith w hich a bank deploys its
total resources for optim izing its profits (Joo, 1996). Generally, the profitability
is m easured with the help o f net interest margin, spread ratios, bui den ratios,
>
interest earned and expended as % o f working funds, etc.

The m ajor com ponents o f bank profitability are net interes': margin,
establishm ent costs, and provisioning and the best route to higher earnings is
through im provem ent in the net interest m argin w hich is the difference between
interest earnings and interest expenses, expressed as a percentage 01 working
funds. A good m argin reflects effective deploym ent o f high qualiU earning
assets, a judicious m ix o f liabilities and good yields (Discussion paper-, Govt, o f
India, 1993) o f late, the m ost im portant m easure o f profitability has came up as

Return on Equity.
 Return on Equity (ROE) measures profitability from the shareholder’s

perspective. A ccounting ROE, however, should not be confused with investment

profitability (or return) as m easured by dividends and stock-price appreciation.

A ccounting RO E m easures bank accounting profits per dollar / rupee o f book

equity capital. It is generally defined as net income divided by average equity.

B ecause RO E can be decom posed into a leverage factor (the equity multiplier, or

EM ) and return on assets (ROA), ROE=ROAxEM . Return on assets (ROA),

defined as net incom e divided by average or total assets, m easures bank profits

per dollar o f assets. The equity m ultiplier (EM ) is average assets livided by

average equity, the reciprocal o f the capital- to- asset ratio. It provides a gauge o f

b ank’s leverage (l-l/E M = d eb t-to-asset ratio) or the dollar am ount o f assets

pyram ided on the bank’s base o f equity capital. The equity m ultipli er provides

the leverage that makes ROE a m ultiple o f ROA.

T he ROE M odel
Return on Equity = Return on A ssets x Equity M ultiplier

RO A x EM

= Profit M argin x A sset utilization * Equity M ultiplier

PM x A U x EM

N et In c o m e / A v era g e E q u ity = N et In com e / O p eratin g In com e xO p eratin g In com e

/ A verage Assets + A verage A ssets / Averagi. Equity

 T o ta l in c o m e (R ) D e p o s it
m in u s p lu s
Net In te r e s t
in c o m e e x p e n s e (C ) N o n d e p o s it

S a la r ie s a n d w s c je s
m in u s
p lu s

N et occupancy expenses
O p e r a t in g a n d
d iv id e d p lu s
o th e r e x p e n s e s ( O )
by
m in u s P r o v is io n f o r lo a r. lo s s e s
p lu s
I n c o m e t a x e s (T )
O th e r e x p e n s e s

I n t e r e s t a n d f e e s o n lo a n s
T o ta l
p lu s
in c o m e
ROAa I n te r e s t o n in v e s t m e n t

p lu s

S e r v ic e c h a r g e s
T o ta l
p lu s B a la n c e s h e e t
in c o m e
O th e r in c o m e

O ff - b a la n c e s h e e t

d iv id e d C ash and due

AUC
by
p lu s - T a x a b le

I n v e s tm e n t s p lu s

T a x -e x e m p t
A v e ra g e
p lu s
a s s e ts
C o m m e r c ia l a n d in d u s tr

Loans p lu s
C onsum er
p lus
p lu s
O th e r a s s e ts
R e a l e s ta te
p lu s
F a rm
: □

::::
p lu s

O th e r lo a n s

a ROA=Return on Assets; b PM -Profit Margin; c AU Asset Utilization.

Source; Sinkey, Joseph F (1998) Commercial Bank Financial Management,
Prentice Hall; 91

= Net Income/ Average Assets x Average Assets / Average Equity

=Net Income / Average Equity
The RO E model contains three alternative measures o f profitability:

(1) return on equity, (2) return on assets, and (3) profit margin. Because the ratios
RO E, RO A, and PM all have the same num erator (net income), the different
denom inators (i.e., average or total equity capital, average or total assets, and
total revenue) sim ply provide alternative perspectives on the measurem ent o f
profitability. A ccounting ROE m easures profitability from the: ow ner’s
perspective. Its prim ary shortcom ing as a m easure o f bank perform ance is that
RO E can be high because a bank has inadequate equity capital. In addition, a
bank w ith negative book equity (book insolvency) and positive prcfits would
show a negative return on equity, whereas a bank with negative bool equity and
negative profits would show a positive return on equity. By splitting RO E into
RO A and EM, we can resolve this dilemma. Thus, RO A is the preferred
accounting m easure o f overall bank perform ance. It m easures how profitable all
o f a bank’s (on-balance sheet) assets are employed. By splitting RO A into PM
and AU, we focus on the third measure o f profitability, PM, and on asset
utilization, AU, or “ total asset turnover”. (Because banks do not generate sales
volum es greater than their total assets, as most non-financial corporations do,
“asset utilization” describes the ratio better than “asset turnover” ). Given a
bank’s ability to generate revenue (sales) as m easured by AU, the profit-m argin
com ponent o f the RO E model focuses on a bank’s ability to control expenses.

(Sinkey, 1998).

L iq u id ity R atin g is B a sed On:-

I. the volatility o f deposits;

II. reliance on interest sensitive funds and level o f borrowings;
III. technical com petence relative to structure o f liabilities;
IV. availability o f assets readily convertible into cash and
V. access to money m arket and other sources o f funds.

Liquidity is evaluated on the basis o f th:: bank’s capacity to promptly m eet

the dem and paym ent o f its obligations and to readily satisfy the reasonable credit
needs o f the com m unity it serves. Consideration is given to the overall asset-
liability m anagem ent strategies and com pliance w ith the laid down policies. The
m ain liquidity ratios applied are Cash Reserve Ratio (CRR), Liquid Assets to
total D eposits Ratio, D em and deposits to aggregate deposits etc. (Patheja, 1994).

C ap ital A d eq u acy / L everage R atio

F or a longtime, the ratio o f capital to deposits was conceived >-.s an ideal
m easure o f capital adequacy. However, over-the years, the capital adequacy
norm s in term s o f capital deposit ratio was found to be inadequate in as m uch as
it did not truly reflect the shock absorption capacity o f capital. Even this proved
to be an ineffective indicator as it did not take into account the composition o f
the assets classified in terms o f risk associated with each categoiy o f assets.
These basic inadequacies o f the system gave rise to the present concept o f capital
adequacy o f the banks in terms o f “Risk-A sset R atio” approach. The m odified
concept o f capital adequacy ratio becam e a key param eter for assessing a bank’s
intrinsic strength. In the current decade because o f the im portance o f capital
adequacy ratio, on the basis o f m odified concept, has rem ained poten' subject o f
research for banking econom ists w orld over (Joo, 1996).

Capital is rated in relation-to (1) the volum e o f risk assets; (2) t i e volum e
o f m arginal and inferior quality assets; (3) bank growth experience, plans and
prospects and (4) the strength o f the m anagem ent in terms o f 1 to 3 above.
C onsideration is also given to the bank’s capital ratios com pared to its peer
group, its earnings retention and its access to capital m arkets or its other
appropriate sources o f financial assistance (Godse, 1996). Capital adequacy, an
indicator o f long-term solvency, is m easured by capital adequacy ratio, leverage
ratio( shareholder’s equity to total capital) net w orth protection rate
(Shareholder’s equity to non-perform ing loan) ( Purohit and M azum dar, 2 003).
A c tiv ity R a tio s
A ctivity ratios are also known as efficiency ratios. These ratios measure
how efficiently the firm is using its resources like turnover o f w orking capital
and turnover o f fixed assets etc. (Gupta, R.K. 1990).

C am el P a ra m etres
The recent innovation in the area o f financial perform ance evaluation o f
banks is CA M EL Rating. A lthough the system was evolved by US regulating
agencies in 1979, but in recent years it becam e widely applicable tool in the
hands o f all regulators worldwide. In India, the system was adopted by the RBI
on the recom m endations o f the Padm anabhan Committee. U nder this system, the
rating o f individual banks is done along five key param eters-capital adequacy,
A sset quality, M anagem ent Capacity, Earnings analysis, and liquidity-yielding
the rating system ’s acronym, CAM EL (Cole and Gunther, 1996). E ich o f the
five dim ension o f perform ance is rated on a scale o f 1 to 5. Rating 1 denotes that
the bank is fundam entally sound, while the rating 2 signifies that lie bank is
fundam entally sound, but may show m odest weaknesses. Rating 3 indicates that
the bank has a com bination o f weaknesses fair to m oderately severe. The bank
w ith m arginal perform ance that is significantly below average is rated as 4. The
w orst rating is 5, m eaning thereby £hat the institution has eritiowi ilnanoml
w eaknesses that render the probability o f failure extrem ely high in the near
future. The aggregate rating is the sum total o f the ratings under all five
com ponents. These ratings 1 to 5 are described as strong, satisfactory, fair,
m arginal and unsatisfactory in that order (Godse, 1996). In the present study the
CA M EL Param etres have been used to test the perform ance o f the banks under
£

study. This m odel has already been applied and proved useful by the researchers
like Cole and Gunther, 1996, Purohit et. al , 2003, Kapil, et.al 2003 and so on.
The CA M EL dim ensions as evaluated in the banks under study are discussed as

follows:
CAPITAL ADEQUACY ANALYSIS

Capital adequacy is a reflection o f the inner strength o f a bank, which

would stand it in good stead during times o f crisis. Capital adequacy may have a

bearing on the overall performance o f a bank, like opening o f new branches,

fresh lending in high risk but profitable areas, manpower recruitment and

diversification o f business through subsidiaries or through specially designated

branches, as the RBI could think these operational dimensions to the bank's

capital adequacy achievement (Shankar, 1997). Realizing the importance of

capital adequacy, the Reserve Bank o f India (RBI) issued directive in 1992.

whereby each banks in India was required to meet the capital adequacy standard

o f 8%. the norm fixed on the basis o f the recommendations o f Basel Committee.

As a sequel to this direction almost all banks in India try to adhere to this norm,

thus compute the ratios o f capital adequacy.

The computation o f capital adequacy ratio is done by taking ratio of

equitv capital and loan loss provisions minus non-performing loans to total

assets. Expressed as a percentage* the ratio shows the ability o f a bank to

withstand losses in the value o f its assets. The simultaneous monitoring of two

important elements, viz. the level o f NPAs and equity capital is facilitated by the

use o f this ratio (Joshi & Joshi. 2002). For computation o f the capital adequacy

ratio, capital is classified as Tier-1 and Tier-2 capitals. Tier-1 capital comprises

the equity capital and free reserves, while Tier-2 capital comprises subordinated

debt o f 5-7 year tenure. The higher the capital adequacy ratio (CAR), the

stronger the bank. However, a very high CAR indicates that the bank is

conservative and has not utilized the full potential o f its capital. The capital

adequacy ratios o f the banks under study are giv en in tables 5.1 and 5.2.
 TABLE 5.1
CAPITAL ADEQUACY RATIOS OF PUNJAB NATIONAL BANK
S. Capital Adequacy Standard
2001 2002 2003 2004 2005 Mean
No Ratios Deviation
a Capital Adequacy Ratio 10.24% 10.70% 12.02% 13.10% 14.78% 12.16c % 1.843

b Leverage Ratio 1.762 1.682 1.580 1.876 1.827 1.746 0.119

c Net worth protection 7714.235 7768.841 8098.281 10731.622 21813.839 11225 6050
Source: Annual Reports o PNB (2001-2005.)

The position o f capital adequacy o f the Punjab N ational Ban'; (PNB) has
been m easured w ith the help o f Capital Adequacy Ratio (CAR), Leverage ratio
and N et w orth protection. A n introspection o f the table 5.1 reveals that the
capital adequacy ratio o f the PNB in the last five years have been well above the
norm o f RBI i.e. 8% level. This ratio has been increasing year after year 10.24%
in the year 2001 and 14.78% in the year 2005. The average o f the five years also
is good 12.16% w hich seems quite consistent as standard deviation oeing only

1.84.

Sim ilarly the leverage ratio (Total outside liability to shareholders funds
also show a healthy sign; A lthough the ratio declined from 1.76 in 2001 to 1.68
in 2002, but has picked up in the subsequent years.

However, the m ean value o f the leverage ratio is 1.74 w ith .119 standard
deviation. So far as N et w orth protection (Net W orth to N on-Perform ing assets)
is concerned. The ratio has been all along rising during the period under study
w ith 7714.235 in 2001 to 21813.839 in 2005 w ith the m ean value 11225.To

m aintain the capital adequacy, the bank has m obilised capital from the stock
m arket. Thus the bank has been able to m aintain the confidence o f im ustors and

depositors.

The position o f capital adequacy o f the Jamm u & K ashm ir Bank (JKB)
has been m easured w ith the help o f Capital Adequacy Ratio (CAR), Leverage

(T fT )
ratio and N et worth protection. A n introspection o f the table 5.2 reveals that the
capital adequacy ratio o f the JKB in the last five years has been well above the
norm o f RBI i.e. 8% level, although decreasing year after year I 7 .44% in the
year 2001 and 15.15% in the year 2005. But still it is com fortably much above
the m inim um stipulated standard. The average o f the five years a'so is good
16.28% which seems quite consistent as standard deviation being only .961.
T A B L E 5.2

C A P IT A L A D E Q U A C Y R A T IO S O F J A M M U & K A S H M IR B A N K
s. Capital
2001 2002 Standard
No. Adequacy Ratios
2003 2004 2005 Mean
Deviation
a Capital Adequacy
17.44% 15.46% 16.48% 16.88% 15.15% 16.282% 0.961
Ratio

b Leverage Ratio 1.217 0.907 0.706 0.596 0.702 0.828 0.246

c Net worth
28,786.493 39,539.240 49,090.758 55,725.052 52,536.343 45136 10968
protection

Source: Annual Reports of JKB (2001-2005)

Similarly, the leverage ratio (Total outside liability to shareholders funds)

also shows a bit w eak sign as the ratio declined from 1.21 in 2001 to 0.90 in
2002 and has gone down in the subsequent years. The mean value o f the leverage
ratio is .82 w ith .246 standard deviation. The bank needs to be careful here about
the declining trend o f leverage ratio. So far as N et worth protection (Net worth to
>

N on-perform ing assets) is concerned, the ratio has been all along rising during
the period under study with 28786.493 in 2001 to 52536.343 in 200.* with the
m ean value 45136. To m aintain the capital adequacy, the bank has m obilised
capital from the stock market. Thus the bank has been able to m aintain the
confidence o f investors and depositors. Also the bank continued its efforts to
reduce its non-perform ing assets. W ith the strenuous efforts and enhanced
recovery drive coupled w ith stress on sound asset quality and prevention o f fresh
slippages, the bank has been able to further reduce its N PA level. Which has
strengthened its capital base as otherwise too many loss m aking efforts would

have eroded the capital position o f the bank.

A sse t Q u a lity A n a ly sis
A sset quality is another im portant aspect o f the evaluation o f a bank’s
perform ance under the Reserve Bank o f India guidelines, the advances o f a bank
are to be disclosed in a classified m anner as:

(i) Standard
(ii) Sub-Standard
(iii) Doubtful and loss asset
(i) Standard Asset/Advance
Standard assets are those assets that are perform ing and loar t;e is paying
interest and installm ent at due date, further they do not carry more than normal
risk. Form erly, no provisions were required. However, banks will r.ow have to
m ake a general provision o f 0.25 percent on standard assets as well.

(ii) Sub-Standard Asset/Advance

Sub-standard assets are those assets that have been classified as non­
perform ing for a period less than or equal to three quarters. In su d i cases, the
current netw orth o f the borrow er/guarantor or the current m arket value o f the
security charged is not enough to ensure recovery fully. It has full)' developed
w eaknesses that jeopardize the liquidation o f a debt.

(iii) Doubtful Asset/Advance

D oubtful assets are those assets that have rem ained substandard for 18
m onths. The provision o f 100% o f the provisions are to be m ade by the realizable
value o f the security to w hich a bank has recourse. The provisions for this is to

be done as:

First year o f doubtful status ----- D eficit 4 20% o f security

Second year o f doubtful status ----- D eficit + 30% o f ; 'jcurity
Third year o f doubtful status ----- D eficit + 50% ol i. ecurity.
(iv) Loss Asset/Advance
Loss assets are the ones where loss has been identified but the am ount has
not been w ritten o ff wholly or partly. Such an asset is ui collectible/
unrecoverable and o f such little value that its continuance as a bankable asset is
not w arranted although there may be some salvage value. Since the loss assets
are to be w ritten off, 100% provision needs to be made for loss asset s

U nder the above classification, the advance/asset which cease to earn

incom e/interest is term ed as non-perform ing asset and a bank hay to keep a
provision for its probable loss. M ore NPAs means m ore sub-standard, doubtful
and loss assets w hich is total for the future financial performance o f a bank.
Therefore, keeping the NPAs m inim um should be the attem pt o f e v e r/ conscious
bank. The m ain ratios o f asset quality o f the banks under study is given in tables
5.3 and 5.4.

T A B L E 5.3
A S S E T Q U A L IT Y R A T IO S O F PU N JA B N A T IO N A L BA NK

s. Asset Quality Ratios. 2001 2002 2003 2004 2005 Mean

Standard
No Deviation

Net NPA to NET

a 6.74% 5.32% 3.86% 0.98% 0.20% 3.42% 2.79
Advances

b Loan Loss Cover 9.415% 9.452% 9.497% 8.587% 4.490% 8.288% 2.156

The analysis in table 5.3 reveals that the PNB has been successful to
m anage its N PAs. The N et NPAs which were 6.74% o f total N et advan.'-es o f the
bank in 2001 have com edown to 0.20% in 2005. This has been possible by using
various strategies by the bank. The bank through a well defined .Recovery
M anagem ent Policy, was able to effect reduction o f Rs 1647 crore in NPAs
during the year as against Rs 1354 crore last year. N PA s w ith outstanding o f Rs. 1
crore and above continued to be m onitored at corporate level. The Dank also
m ade effective use o f the Securitization and R econstruction o f Financial Assets
and Enforcem ent o f Security Interest A ct 2002(SARFAESI) to accelerate

reduction o f N PA s. For enforcem ent o f security interest under SARFAESI Act,

notices w ere issued to 9640 defaulters and consequently a large num ber o f
borrow ers cam e forward for resolution o f their accounts. Sale o f financ al assets
to A sset R econstruction Com pany (ARC) enabled the bank to take o ff NPAs
from its books and release funds for further recycling. D uring the year, 34 non-
perform ing loans am ounting to Rs. 239 crore were sold to ARC.

M oreover, under the scheme o f one time settlem ent o f the cases for small
and m arginal farmers, N PAs to the tune o f Rs. 513 lakhs were cleared during the
period 2004-2005.

Thus the bank has been able to m anage the N et N PA to N et Advances at

an average o f 3.42%.

To be secure and safe the bank has been m aintaining the provisions for
N PA s as per norms fixed by RBI. It has been in a position to consistently
m aintain such provision w ith 9.415% o f Gross NPAs in 2001 with an average o f
8.28% having standard deviation o f 2.156. In this way the asset quality' position
o f the bank seems good as the loan loss cover for NPAs has been provided prudently.

U nder R B I’s non-discretionary and non-discrim inatory guidelines for

com prom ise settlem ents, there was an encouraging response from the borrowers.
D uring A pril-O ctober, 2004, settlements were approved in 2610-cases for Rs.

44.46 crore.

R ecovery o f N PA s received focussed attention. A part from other recovery

efforts, the bank also organized 20661 Recovery Camps during the year 2004-05
com pared to 17125 camps organized in the previous year. In m ost o f such camps
locally elected representatives also participated. A w areness cam paigns for
recovery w ere also launched in different Zones. Besides these, services o f Debt
Recovery Tribunals and h o k Adalats w ere also utilized for supplem enting the
recovery efforts. The bank also initiated the process o f engaging Recovery
A gencies for effecting recovery in NPAs. A special drive was launched in the
bank tow ards execution o f decrees allowed by the courts. In deserving cases,
restructuring o f debts under CD R m echanism was pursued w ith encouraging

results.
 TABLE 5.4
ASSET QUALITY RATIOS OF JAMMU & KASHMIR BANK
Asset Quality Standard
S.No 2001 2002 2003 2004 2005 Mean
Ratios. Deviation

Net NPA to Net

a 2.45% 1.88% 1.58% 1.48% 1.41% 1.760% 0.425
Advances

b Loan Loss Cover 8.691% 11.552% 5.110% 10.374% 11.902% 9.52% 2.77
Source: Annual Reports of PNB (2001-2005)

The analysis in table 5.4 reveals that the JKB has been successful to
m anage its NPAs. The N et NPAs which were 2.45% o f total N et advances o f the
bank in 2001 have com edown to 1.41% in 2005. This has been possible by using
various strategies by the bank. The bank continued its efforts to reduce its non­
perform ing assets. W ith the strenuous efforts and enhanced recovery drive, the
bank has been able to further reduce its NPA level. Thus the bank has been
successful to manage the N et NPA to Net Advances at an average o f 1.76%. To
be secure and safe, the bank has been maintaining the provisions for NPAs as per
norms fixed by RBI. It has been in a position to consistently maintain such
provision with 8.691% o f Gross NPAs in 2001 with an average o f 9.52% having
standard deviation o f 2.77. In this way, the asset quality position o f the bank
seems quite good as the loan loss cover for NPAs has been provided prudently.

M an a g em en t C apab ility R a tio s

The Perform ance o f M anagem ent capacity is usually qualitative and can
be understood through the subjective evaluation o f M anagem ent systems,
organization culture, control m echanisms and so on. However, the capacity o f the

m anagem ent o f a bank can also be gauged with the help o f certain ratios o f off-
site evaluation o f a bank. The capability o f the m anagem ent to deploy its
resources, aggressively to m aximize the income, utilize the facilities in the bank

productively and reduce costs etc. (Purohit, et.al-2003).

This can be evaluated with reference to the following ratios given in tables

5.5, 5.6. 5.7 and 5.8.

 M A N A G E M E N T C A PA B ILIT Y R A TIO S O F PU N JA B N A TIO N A L BANK
Growth in Various Parameters

S. Compound
2001 2002 2003 2004 2005
No growth rate

a Advances 280,29.0530 343,69.4161 402,28.1209 472,24.7197 604,12.75.4 16%

b Deposits 56131.1302 64123.4752 75813.4973 87916.3958 103166.8869 13%

c Business 84160.1832 98492.8913 116041.6182 135141.1155 163579.6383 14%

d Total Expenses 5696.6912 6151.7862 6418.0244 6525.7167 7428.3229 5%

e Operating Profit 945.2087 1473.8010 2317.2946 3120.8582 2707.2064 24%

f Net Profit 463.6434 562.3891 842.2002 1108.6904 1410.1201 24%

9 E.P.S 21.85 26.49 31.74 41.79 44.72 15%

Source: Annua Reports of PN B (2001-2005)

TA BLE 5.6
M A N A G E M E N T C A PA B ILIT Y R A TIO S O F PU N JA B N A TIO N A L BANK
S. 2002 2003 2004 2005 Moan
Standard
Mgt. Capability Ratios 2001 Deviation
No
Expenditure to Income 0.676 0.732 C.762 0.071
a 0.857 0.806 0.734
Ratio
b Credit- Deposit Ratio 0.499 0.535 0.530 0.537 0.585 0.540 0.032
c Asset Utilization Ratio 0.104 0.104 0.101 0.094 0.080 0.0&4 0.008
d Diversification Ratio 11.719% 12.821% 14.313% 19.360% 16.532% 14.95% 3.05
e Earnings per employee 79.514 97.t99 142.791 188.427 241.752 149.9 66.5
Expenditure per 1088.151 1109.080 1273.521 1102.2 108.2
f 976.983 1063.237
employee
Source: Annual Reports oi PNB (2001 -2005)

In the table 5.5, it is exhibited that the PNB has been a quite successful
bank so far as its business is concerned. D uring the period under reference the
bank has been able to m ark a rising trend in its advances and depos ts w ith Rs.
28029.05 crores, and 56131.13 crores respectively in the year 2001 to Rs.

60412.75 crores and 103166.88 crores in 2005. Thus advances and deposits have
registered a com pound growth rate o f 16% and 13% respectively, w ith the total
fund based business (advances + deposits) m arking a growth o f 14% p.a.

The m anagem ent has been successful to manage a compound growth rate
o f 24% in its operating and N et profits but keeping the total expen:; ss under
control, as they grew only at a growth rate o f 5% p.a. In the sim ilar way, the
efficiency o f the m anagem ent is explained by the growth o f earning p ,v share it
grew at about 15% o f compound growth rate.

The M anagem ent Capacity has also been explained in the table 5.6 with
the help o f various productivity rates, like expenditure to Incom e ratio, credit
deposit ratio, asset utilization ratio, D iversification ratio, earnings per employee
and expenditure per employee. The ratio o f expenditure visa-viz to Incom e which
w as 0.857 in 2001 has gone down to 0.732, in 2005 explaining thereby that for
every rupee generated as incom e only 0.85 paise w ere incurred as cost :n 2001
and so on. The m ean value o f this ratio is 0.76 w ith m inor standard deviation o f
.071 is an encouraging fact. The credit deposit ratio which was 0.499 in 2001 has
slightly im proved to 0.585 in 2005 with the m ean value 0.540 slo w s its
consistency during the period under study. However, the asset utilization ratio
w hich w as 0.104 in 2001 has shown a declining trend as it has come :ow n to
0.080 in 2005, but the m ean value o f the ratio remains by and large consistent at
0.09 level. Since m odern days, the opportunities o f sustaining on spread are
squeezing day in and day out, the success o f any bank lies in diversifying its
business from fund based business to the fee based business. In this direction, the
bank understudy has also achieved good results as the ratio o f non-interest
incom e to total incom e has increased from 11.71% in 2001 to 16.53% in 2005.
This ratio has shown consistency with the average o f 14.95% having a Standard
deviation o f 3.05.The trend in the productivity o f em ployees so far as earnings
are con cerned are significantly improved. The earnings per em ployee were 79.51
in 2001 w hich has gone up to 241.75 in the year 2005, w ith the mean value
149.9. H ow ever, the expenditure per employee has gone up from 976.98 , i 2001

to 1273.52 in 2005 w hich needs to be taken care of.

 M ANAGEMENT CAPABILITY RATIOS OF JAM M U & KASHM IR BANK
G row th in various Param eters
s. Compound
2001 2002 2003 2004 2005
No growth rate

a Advances 47,62.89,58 64,23.88,51 80,10.94,95 92,84.93,62 1,15,17.14,13 24%

b Deposits 1,11,68.08,26 1,29,11.11,17 1,46,74.89,96 1,86,61.38,38 2,16,44.97,'// 14%

c Business 159,30.9,784 193,34.9,968 226,85.8,491 279,46.3,200 331,62.1,140 16%

d Total Expenses 8,84.4,829 11,49.6,214 11,60.8,345 11,94.5,257 12,75.7,917 7%

e Operating Profit 2,72.7,951 4,61.2,419 5,53.7,241 6,28.4,207 3,55.4,660 5%

f Net Profit 1,67.56,19 2,59.80,09 3,37.75,09 4,06.33,00 1,15.06, £0 1%

9 E.P.S 34.83 53.94 70.07 84.22 23.72 1%

Source: Annual Reports of JKB (2001-2005)

In the table 5.7, it is exhibited that the JKB has been a quite successful
bank so far as its fund based business is concerned. D uring the period under
reference, the bank’s business has shown a rising trend in its advances and
deposits w ith Rs. 4762.89 crores, and 11168.08 crores-respectively t i the year
2001 to Rs. 11517.14 crores and 21644.97 crores in 2005. The advances have
registered a com pound growth rate o f 24% and a growth rate o f 14% s observed
in case o f deposits, w ith the total business m arking a growth o f 16% p.a. A
further analysis o f the table reveals that m anagem ent has been successful to
m anage a com pound growth rate o f 5% and 1% in its operating profits and N et
Profits and keeping the total expenses under control, as the expenditure only
grew at a growth rate o f 7% p.a. In the similar w ay, the efficiency o f the
m anagem ent is explained by the growth o f earning per share w hich grew at about

1 % o f com pound growth rate.

The M anagem ent capacity has also been explained in the table 5.8 with
the help o f various productivity ratios, like expenditure to Incom e ratio, credit
deposit ratio, asset utilization ratio, diversification ratio, earnings per employee
and expenditure per employee. The ratio o f expenditure vis-a-vis o Income
w hich was 0.764 in-2001 has gone slightly up to 0.782 in 2005, explaining
thereby that for every rupee generated as incom e only 0.76 paise were incurred
as cost in 2001 and so on. The m ean value o f this ratio is 0.71, with m inor
standard deviation o f .051 is an encouraging fact. The credit deposit . atio which
w as 0.426 in 2001 has slightly im proved to 0.532 in 2005 w ith the m ean value
0.48 shows its consistency during the period under study. H ow ever, the asset
utilization ratio w hich was 0.090 in 2001 has shown a declining trend as it has
com e dow n to 0.066 in 2005, but the mean value o f the ratio rem ains by and
large consistent.

So far as diversifying the business from fund based to fee based, the JKB
has not achieved good perform ance in the last tw o years as the ratio o f non­
interest incom e to total incom e has decreased from 6.97% in 2001 to 5.02% in
2005. This ratio is highly skewed, w ith the average o f 12.25% having a standard
deviation o f 5.75.
TABLE 5.8
MANAGEMENT CAPABILITY RATIOS OF JAMMU & KASHMIR BANK
S. Standard
Mgt Capability Ratios 2001 2002 2003 2004 2005 Mean
No deviation

a Expenditure to Income Ratio 0.764 0.713 0.677 0.655 0.782 0.718 0.051

b Credit-Deposit Ratio 0.426 J3.497 0.645 0.497 0.532 0.502 0.045

c Asset Utilization Ratio 0.090 0.109 0.102 0.085 0.066 0.092 0.014

d Diversification Ratio 6.979% 15.961% 16.750% 16.550% 5.028% 12.25% 5.75

e Earnings per employee 258.982 400.001 474.902 573.507 167.421 375.0 163.2

Expenditure per employee 1367.052 1770.009 1632.219 1685.992 1856.237 1662.3 185.6
f
Source: Annual Reports of JKB (2001-2005)

The trend in the productivity o f em ployees so far as Earnings are

concerned have gone done. The earnings per em ployee w ere 258.98 in 2001
w hich has gone upto Rs. 573.50 in 2004, however, declined to Rs. 167.42 in the
year 2005, w ith the mean value 375.0. Similarly, the expenditure per employee
has gone up from 1367.05 in 2001 to 1856.23 in 2005 w hich needs to be taken
care o f i f the banks wants to be successful in the long run.

E arn in gs R a tio s
The Earnings/Profit’ is a Conventional Param eter o f m easuring financial
perform ance. H igher income generally reflects a lack o f financial difficulties and
so w ould be expected to reduce the likelihood o f failure o f a bank (Cole and
Gunther, 1996). In the pre-liberalization phase (before 1991), interest income
used to be reckoned on accrual basis with little variation therein. In the absence
o f any uniform norm on provisioning against bad debts and depreciation in
investm ent, the variation in accounting profit was m ainly due to provisions and
contingencies. Some semblance o f uniformity was first introduced in 1992-93
w ith the phased im plem entation o f prudential accounting standards which
how ever brought about a w ide variation in the current period income, -is interest
incom e w as henceforth required tc be reckoned on a realization basis. This is
reflected in the em ergence o f operational perform ance m easure in th>-: shape o f
earnings analysis (Hansda, 1995). The earnings analysis has beer, done by
analysts like Sankaranarayan, (1995). Business India Study (2002), Kapil et.al,
(2003), Parera, et.al (2005), M ohite Vikram (2005), and so on, with ihe help o f
various accounting ratios. However, for the present study the accour ling ratios
calculated for the purpose o f earnings analysis are depicted in ta b k s 5.9 and

5.10.
TABLE 5.9
EARNINGS (PROFITABILITY) RATIOS OF PUNJAB NATIONAL BANK
Standard
S. 2001 2002 2003 2004 2005 Mean
Earnings Ratios Deviation
No.

0.729% 0.771% 0.976% 1.083% 1.117% 0.936% 0.177

1 R.0.A

R.O.E 13.027% 12.793% 14.970% 15.043% 13.424% 13.850% 1.078

2

(a) Spread Ratio 0.306 0.300 0.357 0.375 0.395 0.350 0.043
3

(b) Net Interest Margin 0.032 0.031 0.036 0.035 0.031 0.034 0.005

Source: Annual Reports of PNB (2001-2005)

It is exhibited in the table 5.9 that the return on assets w hich hi equal to
N et profit to w orking funds has significantly gone up from 0.729% to 1.117% in
the year 2001 to 2005, with the mean value o f 0.93% having consistency, as the
standard deviation is 0.177. However, the return on shareholders funds (R.O.E)
has by and large rem ained constant with the mean value o f 13.85%. I >.this way it
seems the profitability o f the bank is quite satisfactory. A further analysis o f the
table 5.9 reveals that the spread i.e. Interest earned on loans minus interest paid
on deposits has been constantly rising from 0.306 in 2001 to 0.395 in 2005, with
the m ean value o f .35 having a standard deviation o f .043. Similarly, the
contribution o f the spread vis-a-vis to total earning asset has slig h ;ly shown a
down trend from 0.032 in 2001 to 0.031 in the year 2005, with the mean value of 0.03.
T A B L E 5.10
E A R N IN G S (P R O F IT A B IL IT Y ) R A T IO S O F JA M M U & K A S H M IR B A N K
S. Standard
Earnings Ratios 2001 2002 2003 2004 2005 Mean
No. Deviation

1 R.O.A 1.317% 1.767% 2.111% 1.916% 0.470% 1.498% 0.633

2 R.O.E 21.304% 25.369% 25.413% 24.175% 6.566% 20.57% 8.00

3 (a) Spread Ratio 0.308 0.272 0.307 0.340 0.365 0.320 0.037

(b) Net Interest Margin 0.028 0.029 0.031 0.029 0.024 0.028 0.004

Source: Annual Reports of JKB (2001-2005)

It is exhibited in the table 5.10 that the return on assets which is equal to
N et Profit to w orking funds has gone down from 1.317% to 0.470% in the year
2001 to 2005, with the mean value o f 1.49% having consistency, as tlia standard
deviation is 0.633. However, the return on shareholders funds (R.O.E) has by and
large rem ained constant with the mean value o f 20.57%. In this way, it seems the
profitability o f the bank is quite satisfactory. A further analysis o f tin- table 5.10

reveals that the spread i.e. Interest earned on loans minus interest paid on
deposits has been constantly rising from 0.308 in 2001 to 0.365 in the year 2005,
w ith the m ean value ol .32 having a standard deviation o f .037. Sintilarly, the
contribution o f the spread vis-a-vis to total earning asset has slightly shown a
down trend from 0.028 in 2001 to 0.024 in the year 2005, with the mean value of .02.
L iq u id ity R a tio s

a) The ability o f a bank to provide liquidity requires the existenc e o f a highly

liquid and readily transferable stock o f financial assets. L iquidity and
transferability are the key ingredients for such transactions. The liquidity
requirem ent m eans that financial assets m ust be available to owners on
short notice (a day or less) at par. The transferability requirem ent means
that ownership rights in financial assets m ust be portable, at par, to other
econom ic agents, and in a form acceptable to the other party (Sinkey,
Joseph F, JR. 1998).

b) Liquid assets such as investm ent securities, enable a bank fo respond

quickly to unexpected demands for cash and typically reflect. relatively
conservative financial strategies, whereas volatile liabilities, si.oh as large
certificates o f deposits, often reflect relatively aggressivi; financial
strategies im pose high interest expenses, and are subject to quick
w ithdraw al. As a result, we expect higher values o f investm ent securities
to reduce the chance o f failure, whereas higher values o f large certificates
o f deposit should increase the probability o f failure (Cole and Gunther,
1996). Thus liquidity m anagem ent is one o f the m ost im portant functions
o f a bank. I f funds tapped are not properly utilized, the institution should
suffer loss. Idle cash balance in hand has no yield. On the other hand if the
bank does not keep balanced liquid cash in hand, it cannot be able to pay
the dem and w ithdraw al o f depositors, as w ell as, instalm ent o f creditors
and ultim ately paym ent for other contingent liabilities. These w ill lead
overtrading position to the institution and create problem s to borrow funds
at high rate. So proper balanced liquidity should be m aintained by
avoiding inadequate cash position, or excess cash position (Panigrahi,
1996). The liquidity position o f the banks understudy is presented in

tables 5.11 and 5.12 .

 TABLE 5.11
LIQUIDITY RATIOS OF PUNJAB NATIONAL BANK
S. Standard
Liquidity Ratios 2001 2002 2003 2004 2005 Mean
No. Deviation

a Liquid Assets to total Assets Ratio. 0.095 0.087 0.093 0.086 0.064 0.086 0.015

b Govt. &other Securities to total 0.392 0,383 0.392 0.409 0.398 0.394 0.011
Assets. (Investment to total Assets)

c Liquid Assets to Deposits 0.108 0.099 0.106 0.100 0.078 0.100 0.012

d Investment to Deposits. 0.443 0.436 0.445 0.476 0.488 0.460 0.023

Source: Annual Reports of PNB (2001-2005)

In the table 5.11, it is depicted that the liquid assets w hich consist o f cash,
balances w ith RBI and other banks as well as m oney at call and short notice,
form ed Re 0.095 vis-a-vis to rupee 1 (total assets). This ratio has go, e down in
2005 0.064, but at an average it has rem ained consistent with average 0.08. The
investm ent in Govt, and other securities held by the bank vis-a-vis to total assets
are clear indicators o f banks liquidity position, as this investm ent ratio has
rem ained consistent around an average o f 0.39. The total liquid assets
(com bination o f the above two ratios vis-a-vis to depositors has brought the fact
to the forefront that the bank has the ability to m eet any eventuality in case o f
depositors dem and cash/liquid assets, as this ratio has also rem ained by and large
consistent at an average o f 0.10 w ith the standard deviation o f 0.012. Similarly,
the investm ent in securities (Govt, as well others) shows a satisfactory position
o f the bank as the ratio o f investm ent in securities com pared to deposits also
rem ained consistent around an average o f 0.46 w ith 0.023 standard deviation.

In the table 5.12, it is depicted that the liquid assets w hich consist o f cash,
balances w ith RBI and other banks as well as money at call and short notice,
form ed Re. 0.161 vis-a-vis to (total assets). This ratio has gone do\vn in 2005
0.129, but at an average it has rem ained consistent w ith average 0.13. The
investm ent in Govt, and other securities held by the bank vis-a-vis to votal assets
are clear indicators o f banks liquidity position, as this investment ratio has
rem ained consistent around an average o f 0.39. The total liqu d assets
(com bination o f the above two ratios v i s - a - v i s to d e p o s it o r s h a s e x p o s e d t i e fa c t that
the bank has the ability to m eet any eventuality in case o f depositors dem and for
cash/liquid assets, as this ratio has also rem ained by and large consistent at an
average o f 0.14 with the standard deviation o f 0.029. Similarly, the investm ent in
securities (Govt, as well others) shows a satisfactory position o f the bank as the
ratio o f investm ent in securities com pared to deposits also rem ained consistent
around an average o f 0.45 with 0.022 standard deviation.
TABLE 5.12
LIQUIDITY RATIOS OF JAMMU AND KASHMIR BANK

S. Standard
Liquidity Ratios 2001 2002 2003 2004 2005 Mean
No. Deviation

Liquid Assets to total Assets

a 0.161 0.133 0.090 0.137 0.129 0.130 0.025
Ratio.

Govt. &other Securities to total

b 0.421 0.390 0.400 0.398 0.370 0.396 0.018
Assets. (Investment to total Assets)

c Liquid Assets to Deposits 0.184 0.152 0.103 0.156 0.146 0.148 0.029

d Investment to Deposits. 0.480 0.444 0.458 0.452 0.419 0.450 0.022

Source: Annual Reports of JKB (2001-2005)

O verall F in a n c ia l P erform an ce o f th e B an k s u n d er stu d y

The overall Financial Perform ance o f the Banks as exhibited n the table
5.13 reveals that both the Banks have m aintained their capital adequacy ratio
w ell above the RBI standard o f 10%. The other three ratios viz Expenditure to
Incom e, N et Interest M argin, and Return on Assets show a m ixture oi behaviour,
som e are m ore in PNB and less in JKB and vice-versa. H owever, the overall
Index (w hich has been calculated by dividing the average o f individual banks by
the average o f all items o f both banks in part first o f table 5.13) w hich is more in
case o f PNB com pare to JKB but part second and part third in the table show a

reverse trend.
 Table 5.13
OVERALL FINANCIAL PERFORMANCE OF THE BANKS UNDERSTUDY

PNB JKB

Capital Adequacy 12.16 16.28

Expenditure/Income 76.2 71.8

Parti Net Interest Margin 3.4 2.8

Return on Assets 0.93 1.49

Overall Index 1.006 0.998

Rank 1 2

NPA to Net Advances 3.42 1.76

Part II Index 3.42 1.76

Rank 2 1

Part III Liquid assets to Total Deposits 10.00 14.8

Rank 2 1

Source: Annua] Reports of PNB and JKB (2001-2005).

Note: Overall Performance Index has been calculated by dividing the average of individual banks by the
average of all items of both banks in Part I.
>

C o n c lu sio n
The analysis and the discussion in the preceding pages reveals that both
the banks are financially viable as both have adopted prudent policies o f financial
m anagem ent. Both the banks have m anaged their capital adequacy ratio well
above the m inim um standard o f 10% fixed by RBI. The average leverage ratio in

case o f PNB is m ore (1.746) com pared to JKB (0.828).

So far as Asset quality is concerned both the banks have shown significant

perform ance. The PNB has been able to maintain the ratio o f N et NPA s to Net
advances at 3.42%. The JKB bank has been more efficient by m aintaining the
average ratio o f N et NPAs to N et advances at 1.760%. Similarly, the average
loan loss cover m aintained by JKB (9.52% ) is more than that o f PNB (8.288%).
The business (A dvances + Deposits) o f the PNB and the JKB have
registered a com pound growth rate o f 14% & 16% respectively. However, the
com pound grow th rate o f operating profit has been 24% in PNB and 5% in JKB.
The PNB has succeeded in diversifying its business from fund-based to fee-based
activities and registered an average incom e o f 14.95% while as JKB has
generated 12.25% from this activity. The JKB, in view o f the squeezing o f spread
scenario needs to add more fee based products and services in its portfolio.
H owever, the productivity ratios like earnings per em ployee and expenditure per
em ployee are m ore in case o f JKB compare to the PNB.
The PNB has generated an average N et Interest margin o f 0.034 compare
to 0.028 generated by JKB. However, return on assets is more (1.498% ) in case
o f JKB com pare to PNB (0.936%).
The spread m anagem ent shows that PNB has received more interest on
advances vis-a-vis interest paid on deposits, the average spread ratio being 0.350.
W ith average spread ratio o f 0.320, the JKB has not been as successful as PNB in
the m anagem ent o f its spread (interest received-interest paid).
The liquidity in a bank is what is blood in a hum an body. The bank should
be in a position to m eet its liability holders as an when dem and arises. Thus the
appropriate m ixture o f liquid and non liquid asset is m aintained. For this an
appropriate strategy o f liability and assets m anagem ent is designed. The liquidity
position o f JKB, with 0.148 liquid assets to deposits ratio is better than the PNB
where the same ratio is only 0.100. However, the investm ent to deposit ratio is

better in PNB (0.460) com pare to JKB (0.450).

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