DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM, A.P., INDIA

PROJECT TITLE – FINANCIAL ANALYSIS OF BANKS

SUBJECT: BANKING LAW

NAME OF THE FACULTY: MR. POOSARLA BAYOLA KIRAN SIR

NAME OF THE STUDENT: SANSKAR JAIN

ROLL NO. 2018080

SEM 6
ACKNOWLEDGEMENT

I'd like to express my heartfelt gratitude to my teacher, who provided me with the wonderful
opportunity to do this wonderful project on the subject, as well as assisting me in conducting
extensive research and educating me on a variety of new topics for which I am grateful.

Second, I'd like to express my gratitude to my teammates, who assisted me greatly in

completing this project within the time constraints.
 CHAPTERISATI0N

ABSTRACT

INTRODUCTION

FINANCIAL ANALYSIS OF BANKS

METHOD USED TO MEASURE FINANCIAL POSITION OF BANKING

INSTITUTIONS

RECOMMENDATIONS & CONCLUSIONS

ABSTRACT

The Indian banking sector is a vital part of the country's financial system. The aim of this
research is to assess the financial position, profitability, and efficiency of the largest public
sector bank (SBI) and the largest private sector bank (SBI) (HDFC). The study's aim is to
determine the financial position and performance of the selected banks, as well as to see
whether there are any major differences in their performance. The financial strength of the
selected banks was evaluated using the CAMEL model. To draw the conclusion of the
analysis, the T-test was used on key parameters such as capital adequacy, asset quality,
management performance, earnings potential, and liquidity.
INTRODUCTION

A country's economic growth is dependent on its financial system improving. One of the
most important parts of the financial system is the banking industry. The industry, as well as
agriculture and households, benefit from financial services provided by the sector. It's also
critical for the economy's capital creation. The banking sector in India plays a significant role
in the country's economic development. The Reserve Bank of India (RBI) is the Indian
banking industry's apex body. It maintains the country's monetary stability. After its
inception, the Reserve Bank of India (RBI) has taken a number of steps to increase financial
inclusion through financial education, awareness and technological up gradations in an
affordable manner. The banking sector's success is thought to be a significant economic
factor in the Indian economy. As a result, banking reforms are aimed at increasing the
efficiency of banks. The banking sector, on the other hand, is confronted with troubling
challenges such as increased competition, a rise in non-performing assets, and a deterioration
in asset quality. This could damage the country's economy.

FINANCIAL ANALYSIS OF BANKS

State-owned banks, whether agricultural, industrial, or multipurpose, are distinguished by

their reliance on the government and external donors for resources at low interest rates,
the availability of a larger subsidy than private banks, and the provision of a limited range
of financial services (for example, they do not accept large amounts of demand deposits
or provide money transfer services). They also have simple, low-cost access to
government services. As a result, they are under no obligation to be operationally
effective, to strictly implement loan recovery, or to leverage rural communities' savings.
Instead of savers and borrowers, they act as intermediaries between the government and
the rural sector.

It is unsatisfactory to judge their success exclusively or even primarily in terms of

earnings performance, given their broader social obligations and the use governments
make of them in implementing macroeconomic policies (both of which are likely to clash
with profitability). Profitability can be an appropriate measure of productivity and
effectiveness in a private sector bank, but it is only a partial measure in a state-owned
bank, whether agricultural or not.
The margin between funding costs and lending rates, which is affected heavily by
government policies, determines the degree of earnings in these banks. The government
contributes to the bank's capital, and the central bank supplements this with low-cost
funds to support the bank's lending operations. These lower costs are intended to mitigate
the effect of higher agricultural credit costs and risks on the overall profitability of the
bank.

As a result, evaluating the bank's earnings output can reveal more about government
policy than about the bank's own efficiency. Furthermore, it lacks the banks' broader
economic and social obligations. As a result, it's critical to abandon the notion that an
agricultural bank's overall success can be summed up in a single figure of profitability.
To disclose the various aspects of its results, a number of performance measures will be
needed. These metrics will be based on the prudent banking philosophy.

Reasonable banking, whether agricultural or otherwise, entails the development of

adequately diversified portfolios of loans and investments (which are generally the risk
assets) by restricting over-concentration of loan portfolios and liabilities, either
geographically or by sector, on a large enough capital base, and with sufficient liquidity
to protect depositors and investors.

The aim of this research is to produce a better analytical structure for presenting various
aspects of results.

1.  DEPOSIT MOBILISATION, which is critical to a financial institution's

survival. It gives you freedom from the political constraints that come with
government funding. Deposits provide protection to depositors against potential
adversities and help develop financial discipline and creditworthiness of
individuals, in addition to contributing to the sustainability and mobilisation of
investment capital (regular transactions build up a lender-borrower history, and
accumulated deposits can be used to support loans).

2. LENDING QUALITY, which focuses on the most important aspect of a bank's

financial analysis and necessitates uniform supplementary data not normally
found in published accounts. Access to structured credit, risk concentration,
portfolio classification, interest accrual, and allowance for loan losses are the key
areas to examine.
 3. CAPITAL ADEQUACY ANALYSIS, which measures the quality of assets as
well as the adequacy of provisions, as any overvaluation of assets or shortfalls in
loan loss provisions would cause capital to be overstated. It shows the margin of
protection available to both depositors and borrowers against unanticipated losses
that the bank can encounter. It is expressed as a percentage of total risk-weighted
assets and shows the capital as a percentage of total risk-weighted assets.

4. LIQUIDITY ANALYSIS determines a bank's capacity to fulfil debt obligations

when they become due. This capability is based on the bank's ability to convert
assets without incurring losses, as well as the bank's ability to collect loans in the
market to fulfil debt obligations, or the wider aspects of asset and liability
management.

5. AN AUDIT OF THE BANK'S EARNINGS results to see if the assets and

equity are producing sufficient returns. Since most agricultural banks are public,
analysts can overlook return on equity. However, in light of recent privatisation
developments, it is necessary to place a greater focus on return on equity.

It is important to use a common framework for developing performance metrics for the
purposes of a bank's financial analysis. A collection of financial accounts is commonly
used as an analytical tool in this phase. As a result, financial statements are the starting
point for a bank's financial evaluation. The word 'financial statements' applies to a bank's
balance sheets, profit and loss (or income) statements, cash flow statements, and other
statements and materials that are meant to provide an accurate and reasonable picture of
the bank's financial situation and results of operations. A accurate and realistic view of
the financial statements necessitates the proper classification and grouping of the
products. It also entails following universally accepted accounting rules in a consistent
manner. Until beginning an analysis of the financial statements, make sure they comply
with generally accepted accounting principles (as defined by the International Accounting
Standards Committee [IASC]), national accounting policies, the legal and regulatory
framework, inflation accounting standards based on IASC Accounting Standard 29 and
an auditor's report, for instance, in relation to a change in accounting policies, insufficient
provisions for losses, and unrealistic revaluation of assets; and, if applicable, the reasons
for changing auditors.
To ensure the accuracy of these statements, they must be audited by auditors who are
independent (both from the entity being audited and from the person appointing them),
experienced, competent, and reputable, and who use procedures and methods that comply
with national standards or practises on the entity's annual financial statements. The auditor's
written opinion and analysis, showing the degree to which the financial statements and
supporting information reports provide an accurate and reasonable view of the bank's
financial situation and performance, is usually the product of this review and verification (i.e.
audit). Audited financial statements and accompanying notes for at least three to five
financial years must be accurate enough to enable meaningful review. Provisional financial
statements will be approved awaiting audit if management signs off on them. However, it
should be noted that financial statements are usually published 6-9 months after the end of
the fiscal year, and relying solely on them may not represent a realistic up-to-date output
unless augmented by internal management accounts.

METHOD USED TO MEASURE FINANCIAL POSITION OF BANKING

INSTITUTIONS

To assess the relative financial condition and efficiency of banks, the CAMEL model is used.
The model was adopted by the RBI in 1996, following the recommendations of the
Padmanabham Committee (1995). Apart from the CAMEL model, statistical methods such as
the Mean and t-test have been used to evaluate bank output using each of the important
parameters such as capital adequacy, asset quality, management effectiveness, earning
capacity, and liquidity to draw reasonable conclusions.

On the basis of secondary data, the CAMEL model and its parameters are shown and
discussed below to assess the financial performance of the chosen banks.

ADEQUACY OF CAPITAL

It shows whether a bank's capital is sufficient to withstand unforeseen losses. It keeps

depositors' confidence in the bank and keeps it from failing. It reveals a bank's overall
financial health and management's ability to meet additional capital requirements.

CAR (CAPITAL ADEQUACY RATIO)

This ratio assesses a bank's ability to absorb losses caused by risk-weighted assets. It's a ratio
of Tire-1 and Tire-2 capital to the total risk-weighted assets. Risk Weighted Assets: CAR =
(Tire 1 Capital + Tire 2 Capital)

The DEBT-TO-EQUITY RATIO is used to assess a bank's financial leverage. The ratio of
gross external liabilities to net worth is known as the leverage ratio. The ratio shows how
much of a bank's operation is funded with debt and how much is financed with equity. A
higher ratio indicates that the bank's creditors and depositors are less protected. DE Debt/Net
Worth Ratio

QUALITY OF ASSETS

It specifies the types of advances made by the bank in order to earn interest. As compared to
lower rated questionable firms, the bank offers credit at a lower rate to highly rated
companies. It establishes the essence of bank debtors. This ratio helps the bank to decide the
financial risk and potential losses attached with their various assets.

RATIO OF ASSET TURNOVER

It determines the bank's asset utilisation quality. It is calculated by dividing total assets by
revenue.

LOAN-TO-VALUE RATIO

The ratio assesses a bank's financial condition and willingness to repay unpaid loans. It is
determined by dividing the total assets by the sum of loans.

RATIO OF NET NPAS TO NET ADVANCES

The ratio expresses the bank's bad loan percentage as a percentage of overall advances. A
higher ratio indicates that the bank is unable to recover the loan, resulting in significant
capital losses. As a result, a lower ratio is assumed to be beneficial to the bank. Total NPA is
divided by total advances to arrive at this figure.

EFFECTIVENESS OF MANAGEMENT

The management efficiency of a bank ensures its growth and survival. It assesses
management efficiency and assigns a premium to higher-quality management and a discount
to lower-quality management. This metric assesses management's effectiveness in producing
revenue and optimising income.

RATIO OF CREDIT DEPOSITS

The proportion of lending to total deposit mobilisation is represented by this ratio. It shows
the bank's ability to turn deposits into high-yielding advances. Total advances are divided by
total customer deposits to arrive at this figure.

EMPLOYEE PROFITABILITY

It shows the bank's human resource productivity and quality. It's calculated by dividing net
profit by the total number of workers on the payroll.

CAPACITY TO EARN

It represents a bank's profitability. It also illustrates the long-term viability and growth of
earnings. A bank's healthy performance is shown by higher earnings. For a bank, generating
adequate earnings is the secret to long-term exits.

RATIO OF NET PROFIT

It demonstrates a company's operating productivity. A higher ratio indicates better

performance, while a lower ratio indicates inefficient management and unnecessary overhead
costs. Net profit is divided by total income to arrive at this figure.

DIVIDENDS PER SHARE

It shows how much each shareholder has paid in dividends. The higher the percentage, the
more efficient the company's operations are. Divide the dividend in equity share capital by
the number of equity shares to arrive at this figure.

EARNINGS PER SHARE

It shows how much money each shareholder has made. This ratio calculates the market value
of a company's stock. A higher ratio indicates that the bank has a better future. It's determined
by multiplying the amount of equity shares by the earnings available to equity owners.

RETURN ON NET WORTH

This ratio depicts the relationship between a company's net profit and its resources employed.
It defines the business's operating performance and overall profitability. The primary goal of
any company is to maximise net worth return.

RETURN ON ASSET

It denotes the management's operating efficiency in asset utilisation and profitability on the
company's assets. It is a general metric for evaluating managerial efficiency in terms of asset
conversion to earnings. Net profit is divided by total assets to arrive at this figure.

RATIO OF INTEREST SPREADS

The interest spread is the difference between interest earned and interest paid. A higher ratio
means that the company can raise more money. It's calculated as a proportion of total assets.

AVAILABILITY OF LIQUID ASSETS

Liquidity is a metric that tests a bank's ability to fulfil short-term financial obligations. When
a company can obtain ample liquid funds either by turning assets into cash or increasing
liabilities, it is said to have an adequate liquidity position. A higher ratio means that the
company is more prosperous.

CURRENTLY AVAILABLE RATIO

It assesses whether current assets are sufficient to cover current liabilities. It assists the bank
in determining its working capital needs. The current asset-to-current-liability ratio is
determined by dividing current assets by current liabilities.

RATIO OF LIQUID ASSETS TO TOTAL ASSETS

It assesses a company's overall liquidity status. Liquid assets are divided by total assets to
arrive at this figure.

RATIO OF LIQUID ASSETS TO TOTAL DEPOSITS

It shows the bank's ability to fulfil its deposit commitments with liquid funds on hand. A
higher ratio indicates that the bank is more capable. Liquid assets are divided by total deposit
to arrive at this figure.
RECOMMENDATIONS & CONCLUSIONS

The Investment Centre's current pattern of financial analysis can be divided into two
categories: (a) financial analysis during project identification, and (b) financial analysis
during project planning. Financial statements from participating banks are examined in both
situations, and financial forecasts are made. The current analytical system, on the other hand,
does not have a consistent research style across the Investment Centre, and there is currently
a lot of variety in practise. It is suggested that a few changes be made.

ANALYSIS OF FINANCIAL STATEMENTS

IMPROVE THE ANALYTICAL PROCESS:

A clearer and better framework for the research should be prepared in order for financial
analysts to diagnose the situation of participating banks using financial statements.

IMPROVE AND STANDARDISE THE PRESENTATION:

In most preparation papers, the latest financial statement presentation does not contain a cash
flow statement. Through adding the cash flow statement, investors will be able to analyse
liquidity problems and banks' declining financial position in circumstances where the entity's
continued activity is only feasible through debt or government funding.

STANDARDIZE THE ASSUMPTION VARIABLES:

There is currently no standardisation in the assumption variables that the analyst selects when
planning the bank's financial forecasts. Although each bank in various sectors would be
unique, standardising the list of assumptions will improve the quality of the study.

DEVELOP A COMMON COLLECTION OF RATIOS:

A common set of core ratios may be created to standardise the analysis.

PLACE A STRONG EMPHASIS ON FINANCIAL ANALYSIS IN THE PROJECT

LIFECYCLE:

Financial analysis should not be limited to project planning or evaluation. It must also be
achieved when under supervision. The analyst will be able to assess the bank's health by
conducting such an audit at least once a year and comparing actual results to predictions
made at appraisal.
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