33598881 Performance Analysis of Top 5 Banks in India Hdfc Sbi Icici Axis Idbi by Satishpgoyal

7/29/2019 33598881 Performance Analysis of Top 5 Banks in India Hdfc Sbi Icici Axis Idbi by Satishpgoyal

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Email: [email protected]

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Chapter No. Content Page No

List of Tables

List of Figures

Executive summary

1. Introduction

Overview of Banking

Objective of study

Research methodology

Limitation of study

2. Review of literature

CAMELS Framework

3. Company profile

HDFC BANK

SBI

AXIS BANK

IDBI

ICICI BANK

4. Findings and conclusion

5.Bibliography

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Table ofcontent


List of Tables

List of Figures

Executive summary

1. Introduction

Overview of Banking

Objective of study


Limitation of study


CAMELS Framework

3. Company profile

HDFC BANK

SBI

AXIS BANK

IDBI

ICICI BANK


5.Bibliography

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List of Tables

List of Figures

Executive summary

1. Introduction

Overview of Banking

Objective of study


Limitation of study


CAMELS Framework

3. Company profile

HDFC BANK

SBI

AXIS BANK

IDBI

ICICI BANK


5.Bibliography


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TableNo. Table Content PageNo.3.1 Capital Adequacy ratio

3.2 Earnings Per Share

3.3 Net Profit Margin

3.4 Return On Assets

3.5 Credit Deposit Ratio

3.6 Gross NPA

3.7 Net NPA

FigureNo.

Title PageNo.

3.1 HDFC BANK3.2 STATE BANK OF INDIA

3.3 AXIS BANK3.4 IDBI BANK3.5 ICICI BANK

3.6 Capital Adequacy ratio3.7 Earnings Per Share3.8 Net Profit Margin3.9 Return On Assets3.10 Credit Deposit Ratio3.11 Gross NPA3.12Net NPA

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3.6 Gross NPA

3.7 Net NPA

FigureNo.

Title PageNo.



3.6 Capital Adequacy ratio3.7 Earnings Per Share3.8 Net Profit Margin3.9 Return On Assets3.10 Credit Deposit Ratio3.11 Gross NPA3.12 Net NPA

List of Tables

List of Figures

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3.6 Gross NPA

3.7 Net NPA

FigureNo.

Title PageNo.



3.6 Capital Adequacy ratio3.7 Earnings Per Share3.8 Net Profit Margin3.9 Return On Assets3.10 Credit Deposit Ratio3.11 Gross NPA3.12Net NPA


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The banking sector has been undergoing a complex, but comprehensivephase ofrestructuring since 1991, with a view to make it sound, efficient, and at thesametime it is forging its links firmly with the real sector for promotion ofsavings,investment and growth. Although a complete turnaround in bankingsector

performance is not expected till the completion of reforms, signs ofimprovementare visible in some indicators under the CAMELS framework. Under this

bank isrequired to enhance capital adequacy, strengthen asset quality,improvemanagement, increase earnings and reduce sensitivity to various financialrisks.The almost simultaneous nature of these developments makes itdifficult todisentangle the positive impact of reformmeasures.

CAMELS

Framework

CAMELSnormsarethesupervisoryframeworkconsistingofrisk-monitoring

factors used for evaluating the performance of banks. This frameworkinvolvesthe analysis of six groups of indicators reflecting the health offinancial

institutions. The indicators are as follows:

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CAMELS

Framework



itutions. The indicators are as follows:

Executive Summery

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CAMELS

Framework



institutions. The indicators are as follows:


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CAPITALADEQUACY ASSET

QUALITY MANAGEMENTSOUNDNESS EARNINGS &PROFITABILITY LIQUIDITY SENSITIVITY TO MARKETRISK

The whole banking scenario has changed in the very recent past ontherecommendations of Narasimham Committee. Further BASELL II Normswereintroduced to internationally standardize processes and make the

bankingindustry more adaptive to the sensitive market risks. Amongst these reformsandrestructuring the CAMELS Framework has its own contribution to thewaymodern banking is looked up on now. The attempt here is to see howvariousratios have been used and interpreted to reveal a banks performance andhowthis particular model encompasses a wide range of parameters making it awidelyusedandacceptedmodelintodaysscenario.Theprojectattemptstoanalysethe

performance of Axis bank on the basis of CAMELS model

andgives suggestions on the basis of the finding of the analysis. The overallstrategyof Axis bank is also studied to gain a better understanding of the working ofthe

bank and to identify its strength and weakness.


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Introduction

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Chapter-01

Introduction

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Without a sound and effective banking system in India it cannot have ahealthyeconomy. The banking system of India should not only be hassle free

but itshould be able to meet new challenges posed by the technology and anyotherexternal and internalfactors. For the past three decades India's banking

systemhas several outstanding achievements to its credit. The most strikingis itsextensive reach. It is no longer confined to only metropolitans or

cosmopolitansin India. In fact, Indian banking system has reached even to the remotecornersof the country. This is one of the main reasons of India's growth process.Thegovernment's regular policy for Indian bank since 1969 has paid richdividendswith the nationalization of 14 major private banks ofIndia.

Not long ago, an account holder had to wait for hours at thebankcounters for getting a draft or for withdrawing his own money. Today, he

has achoice. Gone are days when the most efficient bank transferred money fromonebranch to other in two days. Now it is simple as instant messaging ordials apizza. Money has become the order of the day. The first bank in India,thoughconservative, was established in 1786. From 1786 till today, the

journey ofIndian Banking System can be segregated into three distinctphases.They are as mentionedbelow:

Early phase from 1786 to 1969 of IndianBanks

Nationalization of Indian Banks and up to 1991 prior toIndianbanking sector

Reforms. New phase of Indian Banking System with the advent of

IndianFinancial & Banking Sector Reforms after 1991.


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The General Bank of India was set up in the year 1786. Next cameBank ofHindustan and Bengal Bank. The East India Company establishedBank ofBengal (1809), Bank of Bombay (1840) and Bank of Madras(1843) asindependent units and called it Presidency Banks. These three bankswereamalgamated in 1920 and Imperial Bank of India was established whichstartedas private shareholders banks, mostly Europeansshareholders.

In 1865 Allahabad Bank was established and firsttime

exclusively by Indians, Punjab National Bank Ltd. was set up in 1894withheadquarters at Lahore. Between 1906 and 1913, Bank of India, CentralBankof India, Bank of Baroda, Canara Bank, Indian Bank, and Bank ofMysorewere set up. Reserve Bank of India came in 1935. During the first phasethegrowth was very slow and banks also experienced periodic failures

between1913 and 1948. There were approximately 1100 banks, mostly small.To

streamline the functioning and activities of commercial banks, theGovernmentof India came up with The Banking Companies Act, 1949 which waslaterchanged to Banking Regulation Act 1949 as per amending Act of 1965 (Act

No.23 of 1965). Reserve Bank of India was vested with extensive powers for

thesupervision of banking in India as the Central Banking Authority. Duringthosedays public has lesser confidence in the banks. As an aftermathdepositmobilization was slow. Abreast of it the savings bank facility provided

by thePostal department was comparatively safer. Moreover, funds were largelygiven

aders.

PHASE-01

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aders.

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to traders.


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Government took major steps in this Indian Banking Sector Reform

afterindependence. In 1955, it nationalized Imperial Bank of India withextensivebanking facilities on a large scale especially in rural and semi-urbanareas. Itformed State Bank of India to act as the principal agent of RBI and tohandlebanking transactions of the Union and State Governments all over thecountry.Seven banks forming subsidiary of State Bank of India was nationalized in1960on 19th July, 1969, major process of nationalization was carried out. It wastheeffort of the then Prime Minister of India, Mrs. Indira Gandhi. 14majorcommercial

banks in

the

country

were

nationalized.

Second phase of nationalization Indian Banking Sector Reform was carried out in 1980

withseven more banks. This step brought 80% of the banking segment in IndiaunderGovernment ownership. The following are the steps taken by theGovernment ofIndia to Regulate Banking Institutions in theCountry

:

1949:EnactmentofBankingRegulationAct.1955:NationalizationofStateBankofIndia.1959:NationalizationofSBIsubsidiaries.1961:Insurancecoverextendedtodeposit

s.1969:Nationalizationof14majorbanks.1971:Creationofcreditguaranteecorporation.1975:Creationofregionalruralbanks.1980:Nationalizationofsevenbankswithdepositsover200crore.

After the nationalization of banks, the branches of the public sector bank

Indiarose to approximately 800% in deposits and advances took a huge jumpby11,000%. Banking in the sunshine of Government ownership gave thepublicimplicit faith and immense confidence about the sustainability of

theseitutions.

PHASE-02

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banks in

the

country

were

nationalized.



:





theseitutions.

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banks in

the

country

were

nationalized.



:





theseinstitutions.


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This phase has introduced many more products and facilities in thebankingsector in itsreforms

measure. In 1991, under the chairmanship ofM

Narasimham, a committee was set up by his name which worked fortheliberalization of banking practices. The country is flooded with foreign

banksand their ATM stations. Efforts are being put to give a satisfactoryservice tocustomers. Phone banking and net banking is introduced. The entiresystem

became more convenient and swift. Time is given more importance thanmoney.The financial system of India has shown a great deal of resilience. It isshelteredfrom any crisis triggered by any external macroeconomics shock as otherEastAsian Countries suffered. This is all due to a flexible exchange rateregime,the foreign reserves are high, the capital account is not yet fully convertible,and

ks and their customers have limited foreign exchange exposure.

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ks and their customers have limited foreign exchange exposure.

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banks and their customers have limited foreign exchange exposure.


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RESERVE BANK OF INDIA(RBI)------------------------------

The central bank of the country is the Reserve Bank of India (RBI). Itwas

established in April 1935 with a share capital of Rs. 5 crores on the basis oftherecommendations of the Hilton Young Commission. The share capitalwasdivided into shares of Rs. 100 each fully paid which was entirelyowned by

private shareholders in the beginning. The Government held shares ofnominalvalue of Rs. 2, 20,000. Reserve Bank of India was nationalized in the year1949.The general superintendence and direction of the Bank is entrusted toCentralBoard of Directors of 20 members, the Governor and four Deputy

Governors,one Government official from the Ministry of Finance, ten nominatedDirectors

by the Government to give representation to important elements in theeconomiclife of the country, and four nominated Directors by the CentralGovernment torepresent the four local Boards with the headquarters at Mumbai,Kolkata,Chennai and New Delhi. Local Boards consist of five members eachCentralGovernment appointed for a term of four years to represent territorial

andeconomic interests and the interests of co-operative and indigenous banks.TheReserve Bank of India Act, 1934 was commenced on April 1, 1935. TheAct,1934 (II of 1934) provides the statutory basis of the functioning of the Bank.

TheBank was constituted for the need offollowing:

To regulate the issue of

banknotes To maintain reserves with a view to securing monetary stabilityand To operate the credit and currency system of the country to

itsadvantage.


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Functions of Reserve Bank ofIndia

The Reserve Bank of India Act of 1934 entrust all the important functionsof acentral bank the Reserve Bank ofIndia.

IssueOfNotesUnder Section 22 of the Reserve Bank of India Act, the Bank has the solerightto issue bank notes of all denominations. The distribution of one rupee notesandcoins and small coins all over the country is undertaken by the ReserveBank asagent of the Government. The Reserve Bank has a separate Issue

Departmentwhich is entrusted with the issue of currency notes. The assets andliabilities ofthe Issue Department are kept separate from those of the BankingDepartment.Originally, the assets of the Issue Department were to consist of not lessthantwo-fifths of gold coin, gold bullion or sterling securities provided theamount ofgold was not less than Rs. 40 crores in value. The remaining three-fifthsof theassets might be held in rupee coins, Government of India rupeesecurities,eligible bills of exchange and promissory notes payable in India. Dueto theexigencies of the Second World War and the post-was period, these

provisionswere considerably modified. Since 1957, the Reserve Bank of India isrequiredto maintain gold and foreign exchange reserves of Ra. 200 crores, ofwhich atleast Rs. 115 crores should be in gold. The system as it exists today is knownasthe minimum reservesystem.

Banker toGovernmentThe second important function of the Reserve Bank of India is to actasGovernment banker, agent and adviser. The Reserve Bank is agent ofCentralGovernment and of all State Governments in India excepting that of Jammuand

Kashmir. The Reserve Bank has the obligation to transact Government business,


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via. to keep the cash balances as deposits free of interest, to receive and tomake

payments on behalf of the Government and to carry out theirexchangeremittances and other banking operations. The Reserve Bank of India helpstheGovernment - both the Union and the States to float new loans and tomanage

public debt. The Bank makes ways and means advances to the Governmentsfor90 days. It makes loans and advances to the States and local authorities. It acts

asadviser to the Government on all monetary and bankingmatters.

Bankers' Bank and Lender of the Last

ResortThe Reserve Bank of India acts as the bankers' bank. According to theprovisionsof the Banking Companies Act of 1949, every scheduled bank wasrequired tomaintain with the Reserve Bank a cash balance equivalent to 5% of itsdemandliabilities and 2 per cent of its time liabilities in India. By anamendment of1962, the distinction between demand and time liabilities was abolished

andbanks have been asked to keep cash reserves equal to 3 per cent of

theiraggregate deposit liabilities. The minimum cash requirements can bechanged bythe Reserve Bank of India. The scheduled banks can borrow from theReserveBank of India on the basis of eligible securities or get financialaccommodationin times of need or stringency by rediscounting bills of exchange.Sincecommercial banks can always expect the Reserve Bank of India to come totheirhelp in times of banking crisis the Reserve Bank becomes not only the

banker's

bank but also the lender of the last resort.


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Controller ofCreditThe Reserve Bank of India is the controller of credit i.e. it has the

power to

influence the volume of credit created by banks in India. It can do sothroughchanging the Bank rate or through open market operations. According totheBanking Regulation Act of 1949, the Reserve Bank of India can askany

particular bank or the whole banking system not to lend to particulargroups or

persons on the basis of certain types of securities. Since 1956, selectivecontrolsof credit are increasingly being used by the ReserveBank.The Reserve Bank of India is armed with many more powers to control

theIndian money market. Every bank has to get a license from the ReserveBank ofIndia to do banking business within India, the license can be cancelled bytheReserve Bank of certain stipulated conditions are not fulfilled. Every

bank willhave to get the permission of the Reserve Bank before it can open a new

branch.Each scheduled bank must send a weekly return to the Reserve Bankshowing, indetail, its assets and liabilities. This power of the Bank to call for

information isalso intended to give it effective control of the credit system. The ReserveBankhas also the power to inspect the accounts of any commercial bank. Assupreme

banking authority in the country, the Reserve Bank of India, therefore,has thefollowing

powers:a) It holds the cash reserves of all the scheduled

banks.(b) It controls the credit operations of banks through quantitativeand

qualitativecontrols.(c) It controls the banking system through the system of licensing,inspectionand calling forinformation.(d) It acts as the lender of the last resort by providing rediscountfacilities to

scheduled banks.


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Custodian of ForeignReservesThe Reserve Bank of India has the responsibility to maintain the officialrate of

exchange. According to the Reserve Bank of India Act of 1934, the Bankwasrequired to buy and sell at fixed rates any amount of sterling in lots of notlessthan Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935theBank was able to maintain the exchange rate fixed at lsh.6d. Though therewere

periods of extreme pressure in favor of or against the rupee. After Indiabecame amember of the International Monetary Fund in 1946, the Reserve Bankhas theresponsibility of maintaining fixed exchange rates with all other

membercountries of the I.M.F. Besides maintaining the rate of exchange of therupee, theReserve Bank has to act as the custodian of India's reserve ofinternationalcurrencies. The vast sterling balances were acquired and managed by theBank.Further, the RBI has the responsibility of administering the exchangecontrols ofthecountry.

SupervisoryfunctionsIn addition to its traditional central banking functions, the Reserve bankhascertain non-monetary functions of the nature of supervision of banksand

promotion of sound banking in India. The Reserve Bank Act, 1934, andtheBanking Regulation Act, 1949 have given the RBI wide powers ofsupervisionand control over commercial and co-operative banks, relating to licensingand

establishments, branch expansion, liquidity of their assets, managementandmethods of working, amalgamation, reconstruction, and liquidation. TheRBI isauthorized to carry out periodical inspections of the banks and to call forreturns

and necessary information from them. The nationalization of 14 major


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Indian scheduled banks in July 1969 has imposed new responsibilities ontheRBI for directing the growth of banking and credit policies towards morerapiddevelopment of the economy and realization of certain desired socialobjectives.The supervisory functions of the RBI have helped a great deal inimproving thestandard of banking in India to develop on sound lines and to improvethemethods of theiroperation.

PromotionalfunctionsThe Bank now performs variety of developmental and promotional

functions,which, at one time, were regarded as outside the normal scope ofcentral

banking. The Reserve Bank was asked to promote banking habit, extendbankingfacilities to rural and semi-urban areas, and establish and promotenewspecialized financing agencies. Accordingly, the Reserve Bank has helpedin thesetting up of the IFCI and the SFC; it set up the Deposit InsuranceCorporationin 1962, the Unit Trust of India in 1964, the Industrial Development

Bank ofIndia also in 1964, the Agricultural Refinance Corporation of India in1963 andthe Industrial Reconstruction Corporation of India in 1972. Theseinstitutionswere set up directly or indirectly by the Reserve Bank to promote savinghabitand to mobilize savings, and to provide industrial finance as well asagriculturalfinance. The Bank has developed the co-operative credit movement toencouragesaving, to eliminate moneylenders from the villages and to route its shortterm

credit to agriculture. The RBI has set up the Agricultural RefinanceandDevelopment Corporation to provide long-term finance to farmers.


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SCOPE OF THERESEARCH

TostudythestrengthofusingCAMELSframeworkasatoolofperformanceevaluationforbankinginstitutions.

RESEARCHMETHODOLOGYResearch methodology is a very organized and systematic way throughwhich a

particular case or problem can be solvedefficiently.

cal process, which involves:

Defining a problem

Laying the objectives of the research

Sources of data

Methods of data collection

Tabulation of data

Data analysis & processing

Conclusions & Recommendations

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It is a step-by-step logical process, which involves:

Defining a problem

Laying the objectives of the research

Sources of data

Methods of data collection

Tabulation of data

Data analysis & processing

Conclusions & Recommendations

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step-by-step logical process, whinvolves:


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STATEMENT OF THEPROBLEM

In the recent years the financial system especially the banks haveundergonenumerous changes in the form of reforms, regulations & norms.CAMELSframework for the performance evaluation of banks is an addition to this.Thestudy is conducted to analyze the pros & cons of thismodel.

OBJECTIVES OFSTUDY

To do an in-depth analysis of themodel.

To analyze 5 banks to get the desired results by using CAMELS as atoolof measuring

performance.

1. Type of research:Descriptive

i) AREA OF SURVEY: The survey was done for three banks. The studyenvironment

was the Bankingindustry.

ii) DATASOURCE:

Primary Data: Primary data was collected from the companybalancesheets and company profit and lossstatements.

Secondary Data: Secondary data on the subject was collected fromICFAI

journals, company prospectus, company annual reports and IMF websites.


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iii) SAMPLINGTECHNIQUE :

Convenience sampling: Convenience sampling was done fortheselection of the

banks.

iv) PLAN OFANALYSIS:

The data analysis of the information got from the balance sheets was doneandratios were used. Graph and charts were used to illustratetrends..

2. Identification of theparameter:-

The different parameters that were selected for the comparisonis:- CAR

Net ProfitMargin

EPS

Credit DepositRatio

GNPA

NPA

ROA.

4. Samplingplane:-

Sample- ICICI, HDFC, IDBI, AXIS Bank and State Bank of India.


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1) The study was limited to 5

banks.2) Time and resourceconstrains.

3) The method discussed pertains only to banks though it can be usedfor

performance evaluation of other financialinstitutions.4) The study was completely done on the basis of ratios calculated

fromthe balancesheets.5) It has not been possible to get a personal interview with the

topnagement employees of all banks under study.

LIMITATIONS OF THE STUDY

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Chapter-02

Review of literature

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Number of studies has been conducted about the use of CAMEL model.Andnumber of reviews on the previous researches is present but due to

paucity oftime, a few snapshots of literature are givenhere.

Swindle, C, (1995) This study uses the capital adequacy component oftheCAMEL rating system to assess whether regulators in the 1980sinfluencedinadequately capitalized banks to improve their capital. Using ameasure ofregulatory pressure that is based on publicly available information, I findthatinadequately capitalized banks responded to regulators' demands forgreatercapital. This conclusion is consistent with that reached by Keeley (1988).

Yet, ameasure of regulatory pressure based on confidential capital adequacyratingsreveals that capital regulation at national banks was less effective than atstate-chartered

banks.

Cole, Rebel A. and Gunther(1995) Their findings suggest that, if abankhas not been examined for more than two quarters, off-site monitoringsystems

usually provide a more accurate indication of survivability than itsCAMELrating. The lower predictive accuracy for CAMEL ratings "older" thantwoquarters causes the overall accuracy of CAMEL ratings to fallsubstantially

below that of off-site monitoring systems. The higher predictive accuracy ofoff-site systems derives from both their timeliness-an updated off-siterating isavailable for every bank in every quarter-and the accuracy of the financialdataon which they are based. Cole and Gunther conclude that off-site

monitoringsystems should continue to play a prominent role in the supervisory process,as a

complement to on-site examinations.


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Gilbert R., Meyer A., & Vaughan M. (2000) This article examinesthe

potential contribution to bank supervision of a model designed to predictwhich

banks will have their supervisory ratings downgraded in future periods.Banksupervisors rely on various tools of off-site surveillance to track thecondition of

banks under

their

jurisdiction

between

on-site

examinations,

including

econometric models. One of the models that the Federal Reserve System usesforsurveillance was estimated to predict bank failures. The number of

banksdowngraded to problem status in recent years has been substantially largerthanthe number of bank failures. During a period of few bank failures, the

relevanceof this bank failure model for surveillance depends to some extent ontheaccuracy of the model in predicting which banks will have theirsupervisoryratings downgraded to problem status in future periods. This paper comparestheability of two models to predict downgrades of supervisory ratings to

problemstatus: the Board staff model, which was estimated to predict bankfailures,and a model estimated to predict downgrades of supervisory ratings. We find

thatboth models do about as well in predicting downgrades of supervisory ratingsforthe early 1990s. Over time, however, the ability of the downgrademodel to

predict downgrades improves relative to that of the model estimated topredictfailures. This pattern reflects the value of using a model for surveillancethat can

be re-estimated frequently. We conclude that the downgrade model mayprove tobe a useful supplement to the Board's model for estimating failuresduring

periods when most banks are healthy, but that the downgrade model shouldnotbe considered a replacement for the current surveillance framework.


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Lacewell, Stephen Kent (2001). Stage one in the estimation of costandalternative profit efficiency scores using a national model and a size-specific

model. Previous research referred in the paper asserts that anefficiencycomponent should be added to the current CAMEL regulatory ratingsystem toaccount for the ever-increasing diverse components of modernfinancialinstitutions. Stage two is the selection and computation of financialratiosdeemed to be highly correlated with each component of the CAMEL rating.Theresearch shows that there is definitely a relationship between bankefficiencyscores and financial ratios used to proxy a bank's CAMEL rating. It is

alsoevident that certain types of efficiency models are better suited to largebanksthan to small banks and viceversa.

Richard S Barr, Kory A Killgo, Thomas F Siems, & SheriZimmel.(2002) This study reviews previous research on the efficiency and

performanceof financial institutions and uses Siems and Barr's (1998) data

envelopmentanalysis (DEA) model to evaluate the relative productive efficiencyof UScommercial banks 1984-1998. It explains the methodology, discusses theinputand output measures used and relates bank performance measures toefficiency.It describes the CAMEL rating system used by bank examiners andregulators;and finds that banks with high efficiency scores also have strongCAMELratings. The study summarizes the other relationship identified andrecommendsthe use of DEA to help analysts and policy makers understandorganizations ingreater depth, regulators and examiners to develop monitoring tools and

banks tobenchmark their processes.


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Godlewski (2003) has tested the validity of the CAMEL rating typologyfor

bank's default modification in emerging markets. He focused explicitly onusing

a logical model applied to a database of defaulted banks in emergingmarkets. Hefound that the principle results of the early warning signals modelsfollow theCAMEL typology. The proxy variables of bank solvability, assets' qualityandliquidity, particularly loan losses provisions, management quality,

profitability,and intermediation rate have a negative impact on the one year

probability ofbank'sdefault.

Said and Saucier (2003) examined the liquidity, solvency andefficiency ofJapanese Banks. Using CAMEL rating methodology, for a representativesampleof Japanese banks for the period 1993-1999, they evaluated capitaladequacy,assets and management quality, earnings ability and liquidity position.Theyquantified banks managerial quality by calculating X-inefficiencyusing dataenvelopment analysis (DEA). Results support the view that the major

problem offailed banks was not inefficiency of management, but below standardcapitaladequacy and considerable problems in their assets quality. Significantlyaboveaverage efficiency of ailing banks could be explained by a survivalstrategy that

pushed them to drastically improvemanagement.

Derviz et al. (2004) investigated the determinants of the movements inthelong term Standard & Poors and CAMEL bank ratings in the CzechRepublicduring the period when the three biggest banks, representing approximately60%of the Czech banking sector's total assets, were privatized (i.e., the timespan1998-2001). The same list of explanatory variables corresponding to

theCAMEL rating inputs employed by the Czech National Bank's banking sector


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Kapil (2005) examined the relationship between the CAMEL ratingsand the

bank stock performance. The viability of the banks was analyzed on thebasis ofthe Offsite Supervisory Exam ModelCAMEL Model. The M forManagementwas not considered in this paper because all Public Sector Banks, (PSBs)weregovernment regulated, and also because all other four componentsC, A, EandLreflect management quality. The remaining four components wereanalyzedand rated to judge the composite rating. Part A of the study analyzedtheinterbank performance by determining their CAEL composite score. PartB ofthe study assessed the relation between the banks composite CAMEL

ratingswith the banks stock performance. The paper revealed that the Off-siteSupervisory Exam Model, CAMEL, is related to the banks stock

performance inthe capitalmarket.

Hirtle and Lopez, (2005),This research paper was carried out; to findtheadequacy of CAMEL in capturing the overall performance of a bank; to find

therelative weights of importance in all the factors in CAMEL; and lastly toinformon the best ratios to always adopt by banks regulators in evaluating

banks'efficiency. In addition, the best ratios in each of the factors in CAMELwereidentified. For example, the best ratio for Capital Adequacy was found to betheratio of total shareholders' fund to total risk weighted assets. The

paperconcluded that no one factor in CAMEL suffices to depict theoverall

performance of a bank. Among other recommendations, banks' regulatorsarecalled upon to revert to the best identified ratios in CAMEL whenevaluating

banks performance.


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Sarker (2005) examined the CAMEL model for regulation andsupervision ofIslamic banks by the central bank in Bangladesh. With the experience ofmore

than two decades the Islamic banking now covers more than one third oftheprivate banking system of the country and no concerted effort has beenmade toadd a Shariah component both in on-site and off-site banking supervisionsystemof the central bank. Rather it is being done on the basis of the secularsupervisoryand regulatory system as chosen for the traditional banks andfinancialinstitutions. To fill the gap, an attempt had been made in this paper toreview theCAMEL standard set by the BASEL Committee for off-site supervision of

thebanking institutions. This study enabled the regulators and supervisors toget aShariah benchmark to supervise and inspect Islamic banks and Islamicfinancial

institutions from an Islamic perspective.


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"Nuts andBolts"oncept of CAMELS Framework?

pital Adequacy

set Quality

anagement Soundness

rnings & Profitability

quidity

Sensitivity To Market Risk

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pital Adequacy

set Quality

anagement Soundness

rnings & Profitability


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A Capital Adequacy Ratio is a measure of a bank's capital. It is expressedas a

percentage of a bank's risk weighted creditexposures.

Also known as ""Capital to Risk Weighted Assets Ratio(CRAR).

Capital adequacy is measured by the ratio of capital to risk-weightedassets(CRAR). A sound capital base strengthens confidence of depositors. Thisratio isused to protect depositors and promote the stability and efficiency offinancialsystems around theworld.

Asset quality determines the robustness of financial institutions againstloss ofvalue in the assets. The deteriorating value of assets, being primesource of

banking problems, directly pour into other areas, as losses are eventuallywritten-off against capital, whichultimately

jeopardizes the earning capacity ofthe

institution. With this backdrop, the asset quality is gauged in relation to theleveland severity of non-performing assets, adequacy of provisions,recoveries,distribution of assets etc. Popular indicators include non-performingloans to

ances, loan default to total advances, and recoveries to loan default ratios.

pital Adequacy

Asset Quality

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pital Adequacy

Asset Quality

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The solvency of financial institutions typically is at risk when theirassets

become impaired, so it is important to monitor indicators of the quality oftheirassets in terms of overexposure to specific risks, trends in nonperformingloans,and the health and profitability of bank borrowers especially thecorporatesector. Share of bank assets in the aggregate financial sector assets: Inmostemerging markets, banking sector assets comprise well over 80 per cent oftotalfinancial sector assets, whereas these figures are much lower in thedevelopedeconomies. Furthermore, deposits as a share of total bank liabilitieshavedeclined since 1990 in many developed countries, while in developing

countriespublic deposits continue to be dominant in banks. In India, the share ofbankingassets in total financial sector assets is around 75 per cent, as of end-March2008.There is, no doubt, merit in recognizing the importance of diversificationin theinstitutional and instrument-specific aspects of financial intermediationin theinterests of wider choice, competition and stability. However, the dominantroleof banks in financial intermediation in emerging economies and

particularly inIndia will continue in the medium-term; and the banks will continueto bespecial for a long time. In this regard, it is useful to emphasise thedominanceof banks i

nthe

developing

countries

in

promoting

non-bank

financial

intermediaries and services including in development of debt-markets.Evenwhere

role

of banks is apparently

diminishing

in

emerging

markets,

substantively, they continue to play a leading role in non-bankingfinancingactivities, including the development of financialmarkets.

One of the indicators for asset quality is the ratio of non-performingloans tototal loans (GNPA). The gross non-performing loans to gross advancesratio ismore indicative of the quality of credit decisions made by bankers.Higher

GNPA is indicative of poor credit decision-making.


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NPA: Non-PerformingAssets

Advances are classified into performing and non-performing advances(NPAs) asper RBI guidelines. NPAs are further classified into sub-standard, doubtfulandloss assets based on the criteria stipulated by RBI. An asset, including aleasedasset, becomes non-performing when it ceases to generate income for theBank.

An NPA is a loan or an advancewhere:

1. Interest and/or instalment of principal remains overdue for a period of morethan90 days in respect of a term

loan;2. The account remains "out-of-order'' in respect of an Overdraft or Cash

Credit(OD/CC);

3. The bill remains overdue for a period of more than 90 days in case ofbillspurchased and

discounted;4. A loan granted for short duration crops will be treated as an NPA iftheinstallments of principal or interest thereon remain overdue for twocropseasons;and

5. A loan granted for long duration crops will be treated as an NPA iftheinstallments of principal or interest thereon remain overdue for one cropseason.

The Bank classifies an account as an NPA only if the interest imposed

duringany quarter is not fully repaid within 90 days from the end of therelevantquarter. This is a key to the stability of the banking sector. There should benohesitation in stating that Indian banks have done a remarkable job incontainmentof non-performing loans (NPL) considering the overhang issues andoverall

difficult environment. For 2008, the net NPL ratio for the Indian scheduled


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commercial banks at 2.9 per cent is ample testimony to the impressiveefforts

being made by our banking system. In fact, recovery management is alsolinkedto the banks interest margins. The cost and recovery management supported

byenabling legal framework hold the key to future health andcompetitiveness ofthe Indian banks. No doubt, improving recovery-management in India is anarearequiring expeditious and effective actions in legal, institutional and

judicialprocesses.

Management of financial institution is generally evaluated in terms ofcapitaladequacy, asset quality, earnings and profitability, liquidity and risksensitivityratings. In addition, performance evaluation includes compliance with set

norms,ability to plan and react to changing circumstances, technicalcompetence,leadership and administrative ability. In effect, management rating is

just anamalgam of performance in the above-mentionedareas.

Sound management is one of the most important factors behindfinancialinstitutions performance. Indicators of quality of management, however,are

primarily applicable to individual institutions, and cannot be easilyaggregatedacross the sector. Furthermore, given the qualitative nature of management,it isdifficult to judge its soundness just by looking at financial accounts of the

banks.

Nevertheless, total expenditure to total income and operating expense tototal

ense helps in gauging the management quality of the banking institutions.

Management Soundness

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judicialprocesses.






banks.



Management Soundness

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judicialprocesses.






banks.




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Earnings and profitability, the prime source of increase in capitalbase, isexamined with regards to interest rate policies and adequacy of

provisioning. Inaddition, it also helps to support present and future operations of theinstitutions.The single best indicator used to gauge earning is the Return on Assets(ROA),which is net income after taxes to total assetratio.

Strong earnings and profitability profile of banks reflects the ability tosupport

present and future operations. More specifically, this determines thecapacity toabsorb losses, finance its expansion, pay dividends to its shareholders, and

buildup an adequate level of capital. Being front line of defense againsterosion ofcapital base from losses, the need for high earnings and profitability can

hardlybe overemphasized. Although different indicators are used to serve thepurpose,the best and most widely used indicator is Return on Assets (ROA).However,for in-depth analysis, another indicator Net Interest Margins (NIM) is alsoused.Chronically unprofitable financial institutions risk insolvency. Comparedwithmost other indicators, trends in profitability can be more difficult tointerpretfor instance, unusually high profitability can reflect excessive risktaking.

ROA-Return OnAssets

An indicator of how profitable a company is relative to its total assets.ROA

es an idea as to how efficient management is at using its assets to generate

Earnings and Profitability

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ROA-Return OnAssets



Earnings and Profitability

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ROA-Return OnAssets




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earnings. Calculated by dividing a company's annual earnings by its totalassets,ROA is displayed as a percentage. Sometimes this is referred to as "returnoninvestment".

The formula for return on assetsis:

ROA tells what earnings were generated from invested capital (assets).

ROA forpublic companies can vary substantially and will be highly dependenton theindustry. This is why when using ROA as a comparative measure, it is

best tocompare it against a company's previous ROA numbers or the ROA of asimilarcompany.The assets of the company are comprised of both debt and equity. Both ofthesetypes of financing are used to fund the operations of the company. The

ROAfigure gives investors an idea of how effectively the company isconverting themoney it has to invest into net income. The higher the ROA number, the

better,because the company is earning more money on less investment. Forexample, ifone company has a net income of $1 million and total assets of $5million, itsROA is 20%; however, if another company earns the same amount but hastotalassets of $10 million, it has an ROA of 10%. Based on this example, thefirst

company is better at converting its investment into profit. When you reallythinkabout it,

management'smost importan

tjob is to mak

ewise

choicesin

allocating its resources. Anybody can make a profit by throwing a ton ofmoneyat a problem, but very few managers excel at making large profits withlittle

investment


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The common theme in all three contexts is cash. A corporation is liquid if ithasready access to cash. A market is liquid if participants can easilyconvertpositions into cashor conversely. An asset is liquid if it can easily be

convertedto cash. The liquidity of an institution dependson:

the institution's short-term need forcash;

cash onhand;

available lines ofcredit;

the liquidity of the institution's

assets; The institution's reputation in the marketplacehow willingwillcounterparty is to transact trades with or lend to theinstitution?

The liquidity of a market is often measured as the size of its bid-ask spread,butthis is an imperfect metric at best. More generally, Kyle (1985) identifiesthreecomponents of marketliquidity:

Tightness is the bid-askspread;

Depth is the volume of transactions necessary to moveprices;

Resiliency is the speed with which prices return to equilibriumfollowinga largetrade.

Examples of assets that tend to be liquid include foreign exchange; stockstradedin the Stock Exchange or recently issued Treasury bonds. Assets that areoftenilliquid include limited partnerships, thinly traded bonds or realestate.

Cash maintained by the banks and balances with central bank, to total assetratio

(LQD) is an indicator of bank's liquidity. In general, banks with a larger volume


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of liquid assets are perceived safe, since these assets would allow banks tomeetunexpectedwithdrawals.

Credit deposit ratio is a tool used to study the liquidity position of thebank. Itis calculated by dividing the cash held in different forms by total deposit. Ahighratio shows that there is more amounts of liquid cash with the bank tomet itsclients cashwithdrawals.

It refers to the risk that changes in market conditions could adverselyimpact

earnings and/orcapital.Market Risk encompasses exposures associated with changes in interestrates,foreign exchange rates, commodity prices, equity prices, etc. While all oftheseitems are important, the primary risk in most banks is interest rate risk(IRR),which will be the focus of this module. The diversified nature of bankoperationsmakes them vulnerable to various kinds of financial risks. Sensitivityanalysisreflectsinstitutionsexposuretointerestraterisk,foreignexchangevolatilityandequity price risks (these risks are summed in market risk). Risksensitivity ismostlyevaluatedintermsofmanagementsabilitytomonitorandcontrolmarketrisk.Banks are increasingly involved in diversified operations, all ofwhich aresubject to market risk, particularly in the setting of interest rates and thecarryingout of foreign exchange transactions. In countries that allow banks tomaketrades in stock markets or commodity exchanges, there is also a need tomonitor

cators of equity and commodity price risk.


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Interest Rate RiskBasicsIn the most simplistic terms, interest rate risk is a balancingact.

Banksare

trying to balance the quantity of re-pricing assets with the quantity of re-pricingliabilities. For example, when a bank has more liabilities re-pricing in arisingrate environment than assets re-pricing, the net interest margin (NIM)shrinks.Conversely, if your bank is asset sensitive in a rising interest rateenvironment,your NIM will improve because you have more assets re-pricing at higherrates.

An extreme example of a re-pricing imbalance would be funding 30-yearfixed-rate mortgages with 6-month CDs. You can see that in a rising rateenvironmentthe impact on the NIM could be devastating as the liabilities re-price athigherrates but the assets donot.

Because of this exposure, banks are requiredto

monitor and control IRR and to maintain a reasonably well-balancedposition.

Liquidity risk is financial risk due to uncertain liquidity. An institutionmightlose liquidity if its credit rating falls, it experiences sudden unexpectedcashoutflows, or some other event causes counterparties to avoid tradingwith orlending to the institution. A firm is also exposed to liquidity risk ifmarkets onwhich it depends are subject to lossofliquidity.

Liquidity risk tends to compound other risks. If a trading organizationhas a

position in an illiquid asset, its limited ability to liquidate that position atshortnotice will compound its market risk. Suppose a firm has offsetting cashflowswith two different counterparties on a given day. If the counterparty thatowes it

a payment defaults, the firm will have to raise cash from other sources to make


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its payment. Should it be unable to do so, it too we default. Here, liquidityrisk iscompounding creditrisk.

Accordingly, liquidity risk has to be managed in addition to market, creditandother risks. Because of its tendency to compound other risks, it isdifficult orimpossible to isolate liquidity risk. In all but the most simple ofcircumstances,comprehensive metrics of liquidity risk don't exist. Certain techniques ofasset-liability

management

can be applied

to assessing

liquidity

risk.

If an

organization's cash flows are largely contingent, liquidity risk may be

assessedusing some form of scenario analysis. Construct multiple scenarios formarketmovements and defaults over a given period of time. Assess day-to-daycashflows under each scenario. Because balance sheets differed so significantlyfromone organization to the next, there is little standardization in how suchanalysesare

implemented.

Regulators

are

primarily

concerned

about systemic

implications of liquidityrisk.

Business activities entail a variety of risks. For convenience, wedistinguish

between different categories of risk: market risk, credit risk, liquidityrisk, etc.Although such categorization is convenient, it is only informal. Usageanddefinitions vary. Boundaries between categories are blurred. A lossdue towidening credit spreads may reasonably be called a market loss or a creditloss,so market risk and credit risk overlap. Liquidity risk compounds other risks,suchas market risk and credit risk. It cannot be divorced from the risks itcompounds.

An important but somewhat ambiguous distinguish is that between marketriskand business risk. Market risk is exposure to the uncertain market valueof a

portfolio. Business risk is exposure to uncertainty in economic value that cannot


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be marked-to-market. The distinction between market risk and businessrisk

parallels the distinction between market-value accounting and book-valueaccounting.

The distinction between market risk and business risk is ambiguousbecausethere is a vast "gray zone" between the two. There are many instrumentsforwhich markets exist, but the markets are illiquid. Mark-to-market valuesare notusually available, but mark-to-model values provide a more-or-lessaccuratereflection of fair value. Do these instruments pose business risk or market

risk?The decision is important because firms employ fundamentallydifferenttechniques for managing the tworisks.

Business risk is managed with a long-term focus. Techniques include thecarefuldevelopment of business plans and appropriate management oversight.

book-value accounting is generally used, so the issue of day-to-day performance isnot

material. The focus is on achieving a good return on investmentover anextendedhorizon.

Market risk is managed with a short-term focus. Long-term losses areavoided byavoiding losses from one day to the next. On a tactical level, tradersandportfolio managers employ a variety of risk metrics duration andconvexity,the Greeks, beta, etc.to assess their exposures. These allow them to

identifyand reduce any exposures they might consider excessive. On a morestrategiclevel, organizations manage market risk by applying risk limits totraders' or

portfolio managers' activities. Increasingly, value-at-risk is being used todefineand monitor these limits. Some organizations also apply stress testing totheir

portfolios.


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BANK PROFILE

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Chapter-03

BANK PROFILE

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DFC BANK

ate Bank of India

XIS BANK

BI

ICICI

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DFC BANK

ate Bank of India

XIS BANK

ICICI

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HDFC Bank Ltd. is a major Indian financial services company based inMumbai,incorporated in August 1994, after the Reserve Bank of Indiaallowedestablishing private sector banks. The Bank was promoted by theHousingDevelopment Finance Corporation, a premier housing finance company(set upin 1977) of India. HDFC Bank has 1,412 branches and over 3,295 ATMs, in528cities in India, and all branches of the bank are linked on an onlinereal-time

basis. As of September 30, 2008 the bank had total assets of INR1006.82

billion. For the fiscal year 2008-09, the bank has reported netprofit ofRs.2,244.9 crore, up 41% from the previous fiscal. Total annual earnings ofthe

bank increased by 58% reaching at Rs.19,622.8 crore in 2008-09.HDFC Bank is one of the Big Four Banks of India, along with StateBank ofIndia, ICICI Bank and Axis Bank its main

competitors.

HistoryHDFC Bank was incorporated in the year of 1994 by HousingDevelopmentFinance Corporation Limited (HDFC), India's premier housing financecompany.It was among the first companies to receive an 'in principle' approval fromtheReserve Bank of India (RBI) to set up a bank in the private sector.The

Bankcommenced its operations as a Scheduled Commercial Bank in January1995with the help of RBI's liberalization

policies.In a milestone transaction in the Indian banking industry, Times BankLimited(promoted by Bennett, Coleman & Co. / Times Group) was merged withHDFC

Bank Ltd., in 2000. This was the first merger of two private banks in India. As

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HDFC Bank Ltd. is a major Indian financial services company based inMumbai,incorporated in August 1994, after the Reserve Bank of Indiaallowedestablishing private sector banks. The Bank was promoted by theHo

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