AN ASSESSMENT OF INDIAN BANKING COMPANIES

LISTED ON NATIONAL STOCK EXCHANGE BY

PEARLS ANALYSIS
Synopsis submitted to the Madurai Kamaraj University in partial
fulfillment of the requirements for the award of the Degree of

DOCTOR OF PHILOSOPHY IN COMMERCE

Researcher
Mrs.M.SHARMILA DEVI
(Regn.No. - P4875)

Supervisor
Dr.A.MUTHUMANI
Assistant Professor,
Postgraduate and Research Department of Commerce,
Sri S.Ramasamy Naidu Memorial College (Autonomous),
Sattur-626203

MADURAI KAMARAJ UNIVERSITY

MADURAI – 625 021
TAMIL NADU,
INDIA
JANUARY 2019
AN ASSESSMENT OF INDIAN BANKING COMPANIES LISTED ON
NATIONAL STOCK EXCHANGE BY PEARLS ANALYSIS

SYNOPSIS
INTRODUCTION
The banking sector plays a magnificent role in an economy for the smooth as
well as efficient functioning of the different activities of the society. Finance is like
blood to every form of activity. Finance is at the core of socio-economic growth
trajectory of a society. The principal objective of Indian planning has been the attainment
of growth with social justice and equity.
To meet this growing need of finance, the demand for strengthening the banking
system on sound footing gathered momentum during the early period of independence in
India. Banking system occupies an important place in a nation’s economy and is
indispensable in a modern society. The overwhelming role of finance in the economic
development of a country is well recognized and forms the core of the money market in
the economy.
Generally, banks collect money from those who have spare money or who are
saving it from their income as surplus and lend this money out to those who require it.
This mechanism of providing finance is highly valuable and a bare necessity in any
community. But the role of commercial banks is not only confined to savings and its
transmission to those who are in a position to invest it in a profitable enterprise; but also
an instrument of credit creation.
The role of bank has been transformed as prime mover of economic change,
particularly in developing countries. A distinguishing feature of Indian banking industry
comprises a wide range of functions. The financial sector plays a major role in
mobilization and allocation of financial savings from the net savers to the borrowers.
Banks are the most important segment of the financial sector. The structure of the
banking industry affects its performance and efficiency which in turn affects the banks’
ability to collect savings and channelize them into productive investment. The effective
role of intermediation performed by banks adds gain to the real sector of the economy.
In modern era, the process of globalization has imparted its huge influence on the
Indian banking industry. In the post liberalization period, there was an urgent need to

Page | 1
bring about structural changes in the Indian banking system so as to make it
economically viable and competitively strong.
Therefore, the Government of India has set up a High Level Committee with
Mr.M.Narasimham, a former Governor of RBI, as chairman to examine all aspects
relating to the structure, organization, functions and procedures of the financial system.
Based on the recommendations of the Narasimham Committee, the first phase of
Financial Sector Reforms was initiated in 1991. The second phase of Banking Sector
Reforms was initiated in 1998.1 The major reform measures are
 Progressive reduction in Cash Reserve Ratio and Statutory Liquidity Ratio.
 Phasing out concessional rate of interest to priority sectors.
 Deregulation of interest rates.
 Introduction of prudential norms relating to capital adequacy, asset qualification,
provisioning and income recognition.
 Setting up of new private sector banks with a view to induce greater competition and
to improve operational efficiency of the banking system.
 Entry of foreign banks to open offices in India either as branches or as subsidiaries.
 Setting up of Lok Adalats, Debt Recovery Tribunals, Asset Reconstruction
Companies, Settlement Advisory Committee, Corporate Debt Reconstructive
Mechanism etc. for quick recovery / restructuring. Promulgation of Securitisation
and Reconstruction of Financial Assets and Enforcement of Securities Interest
(SARFAESI) Act and its subsequent amendment to ensure creditor rights.
 Introduction of CAMELS supervisory rating system, move towards risk-based
supervision, consolidated supervision of financial conglomerates, strengthening of
off-site surveillance through control returns.
 Recasting of the role of statutory auditors, increased internal control through
strengthening of internal audit.
 Setting up of INFINET as the communication backbone for the financial sector,
introduction of Negotiated Dealing System (NDS) for screen-based trading in
government securities and Real Time Gross Settlement (RTGS) System etc.
As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently
capitalised and well-regulated. The financial and economic conditions in the country are
far superior to any other country in the world. Credit, market and liquidity risk studies
suggest that Indian banks are generally resilient and have withstood the global downturn
Page | 2
well. Indian banking industry has recently witnessed the roll out of innovative banking
models like payments and small finance banks. RBI’s new measures may go a long way
in helping the restructuring of the domestic banking industry. The digital payment
system in India has evolved the most among 25 countries with India’s Immediate
Payment Service (IMPS) being the only system at level 5 in the Faster Payments
Innovation Index (FPII).2 In August 2017, Global rating agency Moody's announced that
its outlook for the Indian banking system is stable. In November 2017, Global rating
agency Moody's upgraded four Indian banks from Baa3 to Baa2.3
The Indian banking system consists of 27 public sector banks, 21 private sector
banks, 49 foreign banks, 56 regional rural banks, 1,562 urban cooperative banks and
94,384 rural cooperative banks, in addition to cooperative credit institutions. Public
sector banks control more than 70 per cent of the banking system assets, thereby leaving
a comparatively smaller share for its private peers. Banks are also encouraging their
customers to manage their finances using mobile phones. The unorganised retail sector in
India has huge untapped potential for adopting digital mode of payments, as 63 per cent
of the retailers are interested in using digital payments like mobile and card payments, as
per a report by Centre for Digital Financial Inclusion (CDFI).
Enhanced spending on infrastructure, speedy implementation of projects and
continuous of reforms are expected to provide further impetus to growth. All these
factors suggest that India’s banking sector is also poised for robust growth as the rapidly
growing business would turn to banks for their credit needs. Also, the advancements in
technology have brought the mobile and internet banking services to the fore. The
banking sector is laying greater emphasis on providing improved services to their clients
and also upgrading their technology infrastructure, in order to enhance the customer’s
overall experience as well as give banks a competitive edge. The digital payments
revolution will trigger massive changes in the way credit is disbursed in India. Debit
cards have radically replaced credit cards as the preferred payment mode in India, after
demonetisation. Debit cards garnered a share of 88.86 per cent of the total card spending.
4
India’s digital lending stood at US$ 75 billion in FY18 and is estimated to reach US$ 1
trillion by FY2023 driven by the five-fold increase in the digital disbursements. 5
Indian banking companies are increasingly focusing on adopting integrated
approach to risk management. Banks have already embraced the international banking
supervision accord of Basel II, and majority of the banks already meet capital
Page | 3
requirements of Basel III, which has a deadline of March 31, 2019. Reserve Bank of
India (RBI) has decided to set up Public Credit Registry (PCR) an extensive database of
credit information which is accessible to all stakeholders. The government passed the
Banking Regulation (Amendment) Bill 2017, which will empower RBI to deal with
NPAs in the banking sector. The Insolvency and Bankruptcy Code (Amendment)
Ordinance Bill, 2017 Bill has been passed and is expected to strengthen the banking
sector. 6 The PCR will also include data form entities like market regulator SEBI, the
corporate affairs ministry Goods and Service Tax Network (GSTN) and the Insolvency
and Bankruptcy Board of India (IBBI) to enable the Banks and financial institutions to
get degree profile of existing and prospective borrowers on a real time basis.
STATEMENT OF THE PROBLEM
The banking sector is the key driver of India’s economic growth. Increase in
working population and growing disposable income will raise the demand of banking
service. The banking sector in India ranks among the top six economies with a GDP of
US$ 2,597 in 2017 and economy is forecasted to grow at 7.3 per cent in 2018. 7, while
providing employment to a significant number of its territory sector workforce. More
than 6.2 million people are employed in the companies either directly or indirectly,
making it one of the biggest job creators in India and a mainstay of the national
economy.
Banking system remains focal point in the financial set up of any developing
country. Banks are regarded as special in view of their specialized functions in the
financial intermediation and payment system. Banking companies played an increasingly
important role in nation’s economy, occupying a pivotal position in the organized money
market; it has acquired a special place with its large network of branches, with its huge
deposits and advances. Effect of financial stability or financial instability with the
gradual change in the very concept of banking and with the entry of state in its
administration, banking has assumed enormous importance as a subject of analysis and
research.
The success of economic growth of a country mainly depends on the effective
performance of banks. Indian capital market is highly dependent on the growth and
prosperity of banking sectors. In recent years, the Indian banking sector continued to
experience deterioration in asset quality, which had a significant impact on their

Page | 4
profitability and their capacity to support credit growth. In response to mounting
delinquent loans of banks, and in order to align the resolution process with the
Insolvency and Bankruptcy Code (IBC) 2016,8 the framework for resolution of stressed
assets was revised, and the previous schemes were withdrawn. Further, the various
processes and input constraints that were embedded in earlier regulatory schemes for
restructuring were removed. Therefore, it is high time to evaluate the performance of
Indian banking companies. In this backdrop, the present study seeks to assess the
financial stability and non performing assets of top five banking companies and
furthermore they are taken for analysis on the basis of their weightage in the CNX bank
index. The researcher used PEARLS technique developed by WOCCU (World Council
for Credit Unions, USA)9 to evaluate various aspects of a company’s operating and
financial performance such as its protection, effective financial structure, asset quality,
rates of return and cost, liquidity and signs of growth to assesses the financial stability of
the selected banking companies. The trend of these ratios over time is studied to check
whether they are improving or deteriorating and also the ratios are compared across
different companies in the same sector to see how they stack up, and to get an idea of
comparative valuations.
OBJECTIVES OF THE STUDY
In line with the statement of the problem as above, the following are the specific
objectives of the study
1. To check how the selected banking companies achieve the standard goals of
PEARLS.
2. To compare all the selected banking companies on the basis of PEARLS analysis
to discover the best performing bank.
3. To appraise the interrelationships among the PEARLS ratios of selected banking
companies.
4. To examine how the selected banking companies achieve the standard level of
non-performing assets (NPAs) prescribed by benchmark of RBI.
5. To assess the position of non-performing assets (NPAs) of the selected banking
companies and also to examine the grades for ratios of NPA.
6. To construct suitable suggestions based on research findings to improve the
effectiveness and efficiency of the banks.

Page | 5
SCOPE OF THE STUDY
The present study is very ample. So the PEARLS analysis is taken into
consideration for the purpose of evaluation and analysis of financial stability and
performance of the selected banking companies. This research is specifically limited to
top five banking companies listed on National Stock Exchange under the CNX bank
index. The banking companies taken for analysis on the basis of their weightage are as
follows HDFC Bank Ltd, ICICI Bank Ltd, Kotak Mahindra Bank Ltd, State Bank of
India and IndusInd Bank Ltd. Here, the researcher has analysed the selected banking
companies on the basis of six parameters of PEARLS i.e. Protection, Effective Financial
Structure, Asset Quality, Rates of Return and Costs, Liquidity and Signs of Growth.
OPERATIONAL DEFINITIONS OF THE CONCEPTS
Net Value of Assets
When the sum of total of net block (gross block – depreciation) is added to the
total net current assets (total current assets – total current liabilities) the result obtained is
called Net value of assets.
Share Holders Fund
Share holders fund includes the total equity capital, reserves and surplus of the
selected company during the study period.
Net Loans
The net loan is calculated by adding a secured and unsecured loan.
Liquid Investment
Investment made for very short period i.e. current investments is called liquid
investment. It is computed by summing up the bank savings accounts and liquidity
reserves deposited in either the National Association or regulatory body is divided by the
amount invested in those areas.
Financial Investments
Investment done by the company in other company’s shares, government and
other approved securities, mutual fund units, certificate of deposits, debentures, bonds,
subsidiaries or joint ventures etc is called financial investment.
Liquid Investment Income

Liquid investment income is the income earned from the current investments.

Page | 6
Financial Investment Income
Financial investment income is the income received from mutual fund
investments, certificate of deposits, debentures and bonds, investment in other
company’s shares and security etc.
Non Financial Investments
Non financial investment includes investments made in physical value like
schools, supermarkets, pharmacies, gold, real estates and residential development
projects.
Savings Deposits
Savings deposits are the combination of the Cash and Bank Balance at the end of
the bank’s financial year.
External Credits
External credit contains loans taken by the institution from other higher financing
agencies for financing its long term or short term requirements. Here, External credit
includes secured and unsecured loans.
Member Share Capital
Member Share Capital is the share capital of the company at the end of the
financial year.
Institutional Capital
Institutional Capital contains all types of Reserves of the Institution. Here,
Reserves include General Reserves, Capital Reserves etc for the Current year.
Non-Earning Assets
Non-Earning Assets Includes the Assets of the organization which does not earn
any direct Revenue for the institution. Here, Non – Earning Assets contains Cash and
Bank Balance, Bills Receivables and Debtors etc.
Other Income
Other Income is the income received from other than Mutual Fund Investments,
investment in other company’s shares and security, etc.
Proposed Dividend
Proposed dividend for a particular year is taken as numerator. Proposed Dividend
is taken from the Balance sheet of the respective company during the period under
review.

Page | 7
Operating Expenses
Non interest expenses are the operating expenses which includes a variety of
operating cost incurred by banking firms during a particular financial year.
Non-Performing Assets
When an asset which cease to generate income for 90 days and above those assets
are called as Non-Performing Assets
Gross NPA
Gross NPA is the total of sub-standard advances, doubtful assets and loss assets.
Net NPA
Net NPAs are those type of NPAs in which the bank has deducted the provision
made for NPAs.
Standard Assets
Standard assets are those assets ones in which the bank is receiving interest as
well as the principal amount of the loan regularly from the customer. If asset fails to be
in category of standard asset that is amount due more than 90 days then it is NPA.
Sub-Standard Assets
Sub-standard asset is one which has been classified as NPA for a period not
exceeding 12 months.
Doubtful Assets
This asset is one which has remained as NPAs for more than one year.
Loss Assets
A loss asset is one which is considered uncollectable and of such little value that
its continuance as a bankable asset is not warranted-although there may be some salvage
or recovery value. Also, these assets would have been identified as “loss assets” by the
bank or internal or external auditors or the RBI inspection but the amount would not
have been written-off wholly.
Net Advances
The amount of principal outstanding is gross advance and the principal together
with outstanding interest is net advance on a particular day.

Page | 8
Gross Advances
"Gross advance" means the sum payable to the payee or for the payee's account
as consideration for transfer of structured settlement payment rights before any
reductions for transfer expenses or other deductions to be made from such consideration.
Problem Asset
The Problem assets ratio shows the proportion of Gross NPA to total asset
Depositor’s Safety Ratio
Due to awareness among depositors towards safety of their money deposited in a
bank they are forced to study the proportion of standard assets of the bank to the outside
liabilities, mostly consisting of their deposits.
Provision Ratio
The provision ratio is used to determine the safety measures adopted by the bank
in case an account slip into the non performing category.
Slippage Ratio
Slippage ratio is calculated as the addition of gross NPAs during the year as a
percentage of outstanding standard assets of the previous year. It is an important
indicator of asset quality and also indicates the degree of deterioration of loan assets of
the bank.
NPA Reduction
Reduction of NPAS means recovery of stressed assets through Lok Adalat, DRT,
SARFAESI Act proceedings, filing civil suits etc for reducing NPAs.
NPA Accretion
Gross NPAs of the banking system continues to rise and there were signs of
stress in restructured portfolio of banks.
HYPOTHESES OF THE RESEARCH
The researcher has framed the following hypotheses for the study
 There is no significant difference in PEARLS ratios in the selected banking
companies during the study period.
 There is no significant interrelationship among PEARLS ratios of the selected
banking companies during the study period.
 There is no significant difference in Non-Performing Asset ratios of the selected
banking companies.

Page | 9
METHODOLOGY
The main source of data used for the study is secondary, derived from the
published annual reports of selected units and also the data are collected from the
journals, reports on trend, progress of banking in India and web sites of relevant banking
companies.
PERIOD OF THE STUDY
This study covers a period of ten years for the period from 2009-10 to 2017-18.
SAMPLING DESIGN
All Indian banking companies listed on National Stock Exchange is formed a
Universe for the present study. Out of the universe, the researcher has identified five
banks which constitute the CNX Bank Index of NSE. Out of the total ten banking
companies constitute the CNX Bank index, the top five banking companies on the basis
of their weightage on the index (81.99) have been selected for analysis. The name, ISIN
code, listing date and the weightage of selected banking companies is presented in
Table I 10
TABLE I
Selected Banking Companies with Listing Date, ISIN Code and
their Weightage in CNX Bank Index
S.No Name of Companies ISIN Code Listing Date Weightage (%)
1 HDFC Bank Ltd INE040A01026 08-Nov-1995 35.95
2 ICICI Bank Ltd INE090A01021 17-Sep-1997 15.06
3 Kotak Mahindra Bank Ltd INE237A01028 20-Dec-1995 14.60
4 State Bank of India INE062A01020 01-Mar-1995 8.20
5 IndusInd Bank ltd INE095A01012 -- 8.18
Total 81.99
Source: www.nseindia.com
TOOLS FOR THE STUDY
The overall progress of the selected banking companies has been analysed with
the help of secondary data. The data collected from the annual report of the selected
banking companies, were entered and classified for analysis. The tools used for the
analysis of the present study are divided into two parts namely A) Pearls Analysis B)
Statistical Analysis. They are discussed as follows

Page | 10
PEARLS Analysis
PEARLS is a set of financial ratios or indicators that help to standardize
terminology between institutions. In total, there are 44 quantitative financial indicators
that facilitate an integral analysis of the financial condition of any financial institution.11
So, the researcher used PEARLS analysis to assess the financial stability and
performance of the selected banking companies. The PEARLS system is uniquely
different. Each letter of the name "PEARLS" looks at a different, but critical aspect of
the credit union. There are six components under the PEARLS analysis namely
Protection, Effective financial structure, Asset quality, Rates of return and costs,
Liquidity and Signs of Growth. The each six components of PEARLS analysis has a sub
ratios which are elaborately explained in the third chapter with its purpose, formulas and
standard goals.
Statistical Analysis
The data were analysed by using Statistical techniques such as Percentage
analysis, Mean, Two way ANOVA Test, One way ANOVA Test, Tukey’s HSD
(Honestly Significant Difference) Test and Multiple Correlation of Coefficient Test has
been used to assess the financial performance of the selected banking companies with the
help of Statistical Package for Social Sciences (SPSS).
In order to test the significant difference in the PEARLS ratios, gross NPAs ratio,
net NPAs ratio, problem asset ratio, depositor’s safety ratio, provision ratio, slippage
ratio, sub standard ratio, doubtful asset ratio, loss asset ratio, NPAs reduction ratio and
NPAs accretion ratio between the years and among the selected banking companies, the
two way ANOVA has been used.
In order to test the significant interrelationship among the ratios of HDFC, ICICI,
Kotak Mahindra, State Bank of India and IndusInd during the study period is tested not
only with the help one way ANOVA but also with the help of Tukey’s HSD (Honestly
Significant Difference).
Multiple Correlation co-efficient is used to ascertain the various interrelationships
among the ratios of HDFC, ICICI, Kotak Mahindra, State Bank of India and IndusInd
during the study period.

Page | 11
CHAPTER SCHEME
The present study captioned, “An assessment of Indian banking companies listed
on National Stock Exchange by PEARLS Analysis” has been branched into seven
chapters as given below:
 The First Chapter presents the introduction and design of the study in detail. It
comprises of introduction, statement of the problem, objectives of the study, scope
of the study, operational definition and concepts, hypotheses of the study,
methodology, period of the study, sampling design, tools for analysis and chapter
scheme.
 The Second Chapter deals with the review of literature.
 The Third Chapter covers the conceptual frame work of PEARLS analysis in
detail. It also includes the importance of each component with their standard goals
given by WOCCU. It also includes the calculative formula of each of the
component of PEARLS.
 The Fourth Chapter is the key chapter of the study. It includes the detailed
analysis of selected Indian banking companies through PEARLS analysis.
 The Fifth Chapter examines with the interrelationships among the PEARLS
ratios. Here the researcher tries to find out the degree of interrelationships among
all the ratios with the help of some statistical tools.
 The Sixth Chapter attempts to identify the position of Non-Performing Assets of
the selected banking companies. It discusses the concept of NPA and its
importance in banking sector, asset classification, NPA management rating model,
Standardized benchmarks of RBI and NPA rating grades of the selected banking
companies.
 The Seventh Chapter represents is the summary of the findings and it offers
suitable suggestions based on the findings of the study.

Page | 12
 REFERENCES
1. https://www.thehindubusinessline.com
2. http://www.bfls.in/concept/
3. https://www.thehindu.com/business/Economy/moodys-lifts-indias-rating-to-
baa2/article20496664.ece
4. Report of Indian Banking Industry as on August 2018 according to reserve bank of
India.
5. Report of FIS.
6. https://economictimes.indiatimes.com/news/economyindicators
7. https://www.thehindubusinessline.com
8. https://www.rbi.org.in/scripts/AnnualReportPublications.aspx?Id=1233
9. https://www.woccu.org/documents/pearls_monograph
10. https://www.nseindia.com/content/indices/ind_nifty_bank.pdf.
11. https://www.woccu.org/documents/pearls_monograph.

Page | 13