Comparitive Analysis of Risk Capital in Both Public

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CHAPTER I

INTRODUCTION


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1.1 BACKGROUND OF THE STUDY

Basel II is the second of the Basel Accords, (now extended and effectively superseded by

Basel III), which are recommendations on banking laws and regulations issued by the Basel

Committee on Banking Supervision.

Basel II, initially published in June 2004, was intended to create an international standard for

banking regulators to control how much capital banks need to put aside to guard against the

types of financial and operational risks banks (and the whole economy) face. One focus was

to maintain sufficient consistency of regulations so that this does not become a source of

competitive inequality amongst internationally active banks. Advocates of Basel II believed

that such an international standard could help protect the international financial system fromthe types of problems that might arise should a major bank or a series of banks collapse. In

theory, Basel II attempted to accomplish this by setting up risk and capital management

requirements designed to ensure that a bank has adequate capital for the risk the bank exposes

itself to through its lending and investment practices. Generally speaking, these rules mean

that the greater risk to which the bank is exposed, the greater the amount of capital the bank

needs to hold to safeguard its solvency and overall economic stability.

Politically, it was difficult to implement Basel II in the regulatory environment prior to 2008,

and progress was generally slow until that year's major banking crisis caused mostly by credit

default swaps, mortgage-backed security markets and similar derivatives. As Basel III was

negotiated, this was top of mind, and accordingly much more stringent standards were

contemplated, and quickly adopted in some key countries including the USA.

The final version aims at:

1. Ensuring that capital allocation is more risk sensitive;2. Enhance disclosure requirements which will allow market participants to assess the

capital adequacy of an institution;

3. Ensuring that credit risk, operational risk and market risk are quantified based on dataand formal techniques;

4. Attempting to align economic and regulatory capital more closely to reduce the scopeforregulatory arbitrage.
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While the final accord has largely addressed the regulatory arbitrage issue, there are still areas

where regulatory capital requirements will diverge from the economic capital.

Basel II uses a "three pillars" concept (1) minimum capital requirements (addressing risk),

(2) supervisory review and (3) market discipline.

The Basel I accord dealt with only parts of each of these pillars. For example: with respect to

the first Basel II pillar, only one risk, credit risk, was dealt with in a simple manner while

market risk was an afterthought; operational risk was not dealt with at all.

1.2 STIPULATIONS OF THE THREE PILLARS UNDER BASEL-II

The Pillar 1 stipulates the minimum capital adequacy ratio and requires allocation of

regulatory capital not only for credit risk and market risk but additionally, for operational risk

as well, which was not covered in the previous accord. The Pillar 2 of the framework deals

with the Supervisory Review Process (SRP), and it requires the banks to develop an Internal

Capital Adequacy Assessment Process (ICAAP) which should encompass their whole risk

universe by addressing all those risks which are either not fully captured or not at all

captured under pillar 1 and assign an appropriate amount of capital internally. Under the

Supervisory Review, the supervisors would conduct a detailed examination of the ICAAP of

the banks, and if warranted, could prescribe a higher capital requirement, over and above the

minimum capital adequacy ratio envisaged in Pillar 1.

The Pillar 3 of the framework, Market Discipline, focuses on the effective public disclosures

to be made by the banks, and is a critical complement to the other two Pillars. It is based on

the basic principle that the markets would be quite responsive to the disclosures made and the

banks would be duly rewarded or penalized by the market forces. It recognizes the fact that

the discipline exerted by the markets can be as powerful as the sanctions imposed by the

regulator.

PREPARATORY MEASURES ADOPTED BY RBI FOR BASEL-II

IMPLEMENTATION

In August 2004, soon after the new framework was released by the BCBS, the banks were
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advised to conduct a self-assessment of their risk management systems and to initiate

remedial measures, as needed, keeping in view the requirements of the Basel-II framework. A

Steering Committee was constituted in October 2004, comprising senior officials from 14

select banks (a mix of public sector, private sector and foreign banks). In February, 2005,

based on the inputs received from this committee, the RBI issued the draft guidelines, for

public comments, on implementation of Pillar 1 and Pillar 3 requirements of the Basel-II

framework. In the light of the feedback received from a wide spectrum of banks and other

stake holders, the draft guidelines were revised and the final guidelines were issued on April

27, 2007. As regards the Pillar 2, the banks have been asked to put in place the requisite

internal Capital Adequacy Assessment Process (ICAAP) with the approval of their Boards.

The minimum capital adequacy ratio prescribed under Basel-II norms continues to be nine

per cent.

PRESENT LEVEL OF PREPAREDNESS OF INDIAN BANKS FOR

IMPLEMENTATION OF BASEL-II

Even before the final guidelines were issued, the RBI had asked the banks in May 2006 to

begin conducting parallel runs, as per the draft guidelines, so as to familiarize them with the

requirements of the new framework. During the period of parallel run, the banks are required

to compute, on an ongoing basis, their capital adequacy ratio both under Basel-I norms,

currently applicable, as well as the Basel-II guidelines to be applicable in future. This

analysis, along with several other prescribed assessments, is to be placed before the Boards of

the respective banks every quarter and is also transmitted to the RBI.

RBI GUIDELINES FOR THE IMPLEMENTATION OF BASEL-II

The foreign banks operating in India and the Indian banks having operational presence

outside India are required to migrate to the Standardised Approach for credit risk and the

Basic Indicator Approach for operational risk with effect from March 31, 2008. All other

Scheduled commercial banks are encouraged to migrate to these approaches under Basel-II,

not later than March 31, 2009. It has been a conscious decision to begin with the simpler

approaches available under the framework. As regards the market risk, the banks will

continue to follow the Standardised-Duration Method, already adopted under the Basel-I


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framework, under Basel-II also.

CHALLENGES AHEAD FROM THE ADOPTION OF BASEL-II

First, the new norms might, in some cases, lead to an increase in the overall regulatory capital

requirements for the banks, if the additional capital required for the operational risk is not

offset by the capital relief available for the credit risk. Second, the Standardised Approach for

credit risk leans heavily on the external credit ratings. While the RBI has accredited four

rating agencies operating in India, the rating penetration in India is rather low and it is

confined to rating of the instruments and not of the issuing entities as a whole. Third, the risk

weighting scheme under Standardised Approach also creates some incentive for some of the

bank clients with loan amount less than Rs.10 crores to remain unrated, since such entities

receive a lower risk weight of 100 per cent against 150 per cent risk weight for a lowest rated

client. Fourth, the new framework could also intensify the competition for the best clients

with high credit ratings, which attract lower capital charge, but will put pressure on the net

interest margins of the bank. Finally, implementing the ICAAP under the Pillar 2 of the

framework would perhaps be the biggest challenge for the banks in India as it requires a

comprehensive risk modeling infrastructure to capture all the known and unknown risks that

are not covered under the other two Pillars of the framework. Though the implementation of

Basel-II would be a challenge for the Indian banks, it provides an opportunity to leverage

capital base, improve the risk management practices and enhance the bottom-line by moving

from capital adequacy to capital efficiency.

1.3 BASEL IIPILLAR I

INTRODUCTION

Credit risk, Market risk and Operational risk are covered under Pillar 1 of Basel II

framework. Credit risk still claims the largest share of the regulatory capital and it

underscores the significance of credit risk in banks operations. This is hardly surprising

reckoning that the several banking crises in many countries had their roots in lax credit

standards, poor portfolio risk management, and the inability or failure to evaluate the impact

of the changing economic environment on credit worthiness of the banks borrowers. The


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sub-prime crisis in the USA is the most recent example of the inadequate credit risk

assessment. The advent of advanced approaches for credit risk in India under the Basel II

framework in the days to come, could be expected to provide an impetus for adopting more

sophisticated credit risk management techniques in banks.

CREDIT RISK

Credit Risk is defined as The inability or unwillingness of the customer or counter party to

meet commitments in relation to lending, hedging, settlement and other financial

transactions. Hence Credit Risk emanates when the counter party is unwilling or unable to

meet or fulfill the contractual obligations / commitments thereby leading to defaults.

OPTIONS FOR COMPUTING CAPITAL CHARGE FOR CREDIT RISK

Under Pillar 1, the framework offers three distinct options for computing capital requirement

for credit risk. These approaches for credit risks are based on increasing risk sensitivity and

allow banks to select an approach that is appropriate to the stage of development of banks

operations. The approaches available for computing capital for credit risk are Standardised

Approach, Foundation Internal Rating Based Approach and Advanced Internal Rating Based

approach.

RBI has decided to implement the Standardised Approach within the stipulated time frame.

As regards the migration to advanced approaches, the RBI has not indicated any specific time

frame. However, the banks that plan to migrate to the advanced approaches would need prior

approval of RBIfor which requisite guidelines would be issued in due course.

STANDARDISED APPROACH

Standardised Approach is the basic approach which banks at a minimum have to use for

moving to Basel II implementation. It is an extension of the existing method of calculation of

capital charge for credit risk. The existing method is refined and made more risk sensitive by:

Introducing more number of risk weights thus aiding finer differentiation in risk


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assessment between asset groups.

Assignment of Risk weights based on the ratings assigned by External Credit ratingagencies recognized by RBI, in case of exposures more than Rs.5 crores.

Recognizing wide range of collaterals (securities) as risk mitigants and netting them offwhile determining the exposure amount on which risk weights are to be applied.

Introducing Retail portfolio with total exposure up to Rs.5 crores and yearly turnoverless than Rs.50 crores as a separate asset group with clear cut definition and criteria.

Assignment of Risk weight for NPA accounts.

The rating assigned by the eligible external credit rating agencies will largely support the

measure of credit risk. Unrated exposures will normally carry 100% risk weight. But for the

financial year 2008-09, all fresh sanctions or renewals in respect of unrated borrowers in

excess of Rs.50 crores will attract a risk weight of 150%. From 2009-10 onwards, unrated

borrowings in excess of 10 crores will attract risk weight of 150%.

CREDIT RISK MITIGATION

CRM refers to permitted methods of netting the exposure value for computing Risk Weights

by using Collateral, Third party guarantee (Guarantee) and On-balance sheet netting. CRM is

available subject to several conditions. Before netting, Exposure Value (EV) and Collateral

Value (CV) are to be adjusted for volatility and possible future fluctuations. EV to be

increased for volatility (premium factor) and CV to be reduced for volatility (discount factor).

These factors are termed as Haircuts (HC).

Therefore, EV after risk mitigation = (EV after HCCV after HC)

EV after Risk mitigation will be multiplied by the Risk Weight of the customer to obtain

Risk-weighted asset amount for the collateralized transaction.


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MARKET RISK

Market Risk is the possibility of loss to a bank caused by changes in market variables. Market

risk is also defined as the risk that the value of on or off balance sheet positions will be

adversely affected by movements in equity and interest rate markets, currency exchange rates

and commodity prices. Market Risk Management of a bank thus involves management of

interest rate risk, foreign exchange risk, commodity price risk and equity price risk. Market

risk is also concerned about the banks ability to meet its obligations as and when they fall

due, as a consequence of liquidity risk. Sound liquidity management can reduce the

probability of a default. Liquidity risk is related to banks inability to pay to its depositors. It

has a strong correlation with other risks such as interest rate risk and credit risk. Under Basel

II, the present system of computing capital requirement for Market risk under the

standardisedduration method will continue.

OPERATIONAL RISK

Operational risk is defined as the risk of direct or indirect loss resulting from inadequate or

failed internal processes, people and systems or from external events. The definition includes

legal risks, but excludes strategic and reputation risk. Operational risk is pervasive and its

ownership and measurement are challenges. Some of the important causes for operational

risk are inadequate segregation of duties, insufficient training and poor HR Policies, lack of

management supervision and inadequate security measures and systems.

METHODOLOGIES FOR CALCULATING OPERATIONAL RISK CAPITAL

Basic indicator approach, Standardised approach and Advanced Measurement Approach are

the three methodologies allowed under Basel II for arriving at the capital charge for

operational risk. RBI has advised the banks to apply the Basic Indicator Approach to migrate

to Basel II in the beginning. Under Basic indicator approach, banks have to hold capital for

operational risk equal to a fixed percentage of the average of positive annual gross income

over the previous 3 years. Thus, capital charge under Basic indicator approach KBia = (GI /

n) x A, where,


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KBia= Capital charge under Basic Indicator Approach

GI = Total gross income over the previous three years

A = 15%

n = No. of years ie 3 years for which income is positive.

TOTAL CAPITAL REQUIREMENT UNDER BASEL II

Banks in India are required to maintain a minimum Capital to Risk-weighted Assets Ratio

(CRAR) of 9% on an ongoing basis (However, Basel II prescribes 8% only). RBI may

consider prescribing a higher level of minimum capital ratio for each bank under the pillar 2

framework on the basis of their respective risk profiles and their risk management systems.

Banks are also encouraged to maintain a Tier 1 CRAR of at least 6% and banks which are

below this level must achieve this ratio on or before 31st March 2010.

COMPONENTS OF CAPITAL

The Basel Capital Accord classifies capital under three Tiers. Tier 1 capital and Tier 2 capital

including the following:

TABLE: 1

TIER 1 CAPITAL TIER 2 CAPITAL

Permanent shareholdersequity

Undisclosed reserves

Perpetual non-cumulativepreference shares

Revaluation reserves

Disclosed reserves General Provisions / Generalloan-loss reserves

Innovative capitalinstruments

Hybrid debt capitalinstruments and subordinated

term debt

Further, at the discretion of the financial regulator of the individual countries, banks may

employ a third tier of capital (Tier 3), consisting of short-term subordinated debt for the sole

purpose of meeting a proportion of the capital requirements for market risks.


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CAPITAL ADEQUACY RATIO

Capital Adequacy Ratio (CAR), also called Capital to Risk (Weighted) Assets Ratio

(CRAR), is a ratio of abank's capital to its risk.National regulators track a bank's CAR to

ensure that it can absorb a reasonable amount of loss and complies with statutory Capital

requirements.

Capital adequacy ratios (CARs) are a measure of the amount of a bank's core capital

expressed as a percentage of its risk-weighted asset.

Capital adequacy ratio is defined as:

(TIER-I CAPITAL + TIER-II CAPITAL) / (RISK WEIGHTED ASSETS)

where Riskcan either be weighted assets ( ) or the respective national regulator's minimum

total capital requirement. If using risk weighted assets,

CAR = ( T1 + T2 ) / a 10%

The percent threshold varies from bank to bank (10% in this case, a common requirement for

regulators conforming to the Basel Accords) is set by the national banking regulator of

different countries.

Two types of capital are measured: tier one capital ( above), which can absorb losses

without a bankbeing required to cease trading, and tier two capital ( above), which can

absorb losses in the event of a winding-up and so provides a lesser degree of protection to

depositors.

This ratio is used to protect depositors and promote the stability and efficiency of banks.

1.4 BASELIIPILLAR II & III

INTRODUCTION

One of the unique aspects of Basel II is its comprehensive approach to risk measurement in

the banking entities, by adopting the now-familiar three-Pillar structure, which goes far

beyond the first Basel Accord. To recapitulate, these are: Pillar 1 the minimum capital ratio,

Pillar 2 the supervisory review process and Pillar 3 the market discipline. The Pillar 1
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provides a menu of alternative approaches, from simple to advanced ones, for determining

the regulatory capital towards credit risk, market risk and operational risk, to cater to the wide

diversity in the banking system across the world. Pillar 2 requires the banks to establish an

Internal Capital Adequacy Assessment Process (ICAAP) to capture all the material risks,

including those that are partly covered or not covered under the other two Pillars. The ICAAP

of the banks is also required to be subject to a supervisory review by the supervisors. The

Pillar 3 prescribes public disclosures of information on the affairs of the banks to enable

effective market discipline on the banks operations.

RBI GUIDELINES UNDER PILLAR-2

The Pillar-2 of the framework deals with the Supervisory Review Process (SRP). The

objective of the SRP is to ensure that the banks have adequate capital to support all materials

risks in their business as also to encourage them to adopt sophisticated risk management

techniques for monitoring and managing their risks. This, in turn, would require a well-

defined internal assessment process within the banks through which they would determine the

additional capital requirement for all material risks, internally, and would also be able to

assure the RBI that adequate capital is actually held towards their all material risk exposures.

The process of assurance could also involve an active dialogue between the bank and the RBI

so that, when warranted, appropriate intervention could be made to either reduce the risk

exposure of the bank or augment its capital. Under Pillar-2, the banks have been advised to

put in place an ICAAP, with the approval of the Board. Thus, ICAAP is an important

component of the Supervisory Review Process. What is important to note here is that the

Pillar 1 stipulates only the minimum capital ratio for the banks whereas the Pillar 2 provides

for a bank-specific review by the supervisors to make an assessment whether all material

risks are getting duly captured in the ICAAP of the bank. If the supervisor is not satisfied in

this behalf, it might well choose to prescribe a higher capital ratio, as per its assessment.

PILLAR-3

This pillar aims to complement the minimum capital requirements and supervisory review

process by developing a set of disclosure requirements which will allow the market

participants to gauge the capital adequacy of an institution.


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Market discipline supplements regulation as sharing of information facilitates assessment of

the bank by others, including investors, analysts, customers, other banks, and rating agencies,

which leads to good corporate governance. The aim of Pillar 3 is to allow market discipline to

operate by requiring institutions to disclose details on the scope of application, capital, risk

exposures, risk assessment processes, and the capital adequacy of the institution. It must be

consistent with how the senior management, including the board, assess and manage the risks

of the institution. When market participants have a sufficient understanding of a bank's

activities and the controls it has in place to manage its exposures, they are better able to

distinguish between banking organizations so that they can reward those that manage their

risks prudently and penalize those that do not.

These disclosures are required to be made at least twice a year, except qualitative disclosures

providing a summary of the general risk management objectives and policies which can be

made annually. Institutions are also required to create a formal policy on what will be

disclosed and controls around them along with the validation and frequency of these

disclosures. In general, the disclosures under Pillar 3 apply to the top consolidated level of

the banking group to which the Basel II framework applies.

1.5 CAMELS RATING SYSTEM

The CAMELS ratings orCamels rating is a supervisory rating system originally developed

in the U.S. to classify a bank's overall condition. It's applied to every bank and credit union in

the U.S. (approximately 8,000 institutions) and is also implemented outside the U.S. by

various banking supervisory regulators.

The components of a bank's condition that are assessed:

(C)apital adequacy (A)ssets (M)anagement Capability (E)arnings (L)iquidity (also called asset liability management) (S)ensitivity (sensitivity to market risk, especially interest rate risk)

Ratings are given from 1 (best) to 5 (worse) in each of the above categories.
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CAPITAL ADEQUACY

Capital provides a cushion to fluctuations in earnings so that credit unions can continue to

operate in periods of loss or negligible earnings. It also provides a measure of reassurance to

the members that the organization will continue to provide financial services. Likewise,capital serves to support growth as a free source of funds and provides protection against

insolvency. While meeting statutory capital requirements is a key factor in determining

capital adequacy, the credit union's operations and risk position may warrant additional

capital beyond the statutory requirements. Maintaining an adequate level of capital is a

critical element.

ASSETS

The asset quality rating is a function of present conditions and the likelihood of future

deterioration or improvement based on economic conditions, current practices and trends.

The examiner assesses credit union's management of credit risk to determine an appropriate

component rating for Asset Quality. Interrelated to the assessment of credit risk, the examiner

evaluates the impact of other risks such as interest rate, liquidity, strategic, and compliance.

MANAGEMENT CAPABILITY

Management is the most forward-looking indicator of condition and a key determinant of

whether a credit union possesses the ability to correctly diagnose and respond to financial

stress. The management component provides examiners with objective, and not purely

subjective, indicators. An assessment of management is not solely dependent on the current

financial condition of the credit union and will not be an average of the other component

ratings.

EARNINGS PERFORMANCE

The continued viability of a credit union depends on its ability to earn an appropriate return

on its assets which enables the institution to fund expansion, remain competitive, and

replenish and/or increase capital.

In evaluating and rating earnings, it is not enough to review past and present performance

alone. Future performance is of equal or greater value, including performance under various

economic conditions. Examiners evaluate "core" earnings: that is the long-run earnings

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review for the reasonableness of the credit union's budget and underlying assumptions is

appropriate for this purpose. Examiners also consider the interrelationships with other risk

areas such as credit and interest rate.

LIQUIDITY

Asset/liability management (ALM) is the process of evaluating, monitoring, and controlling

balance sheet risk (interest rate risk and liquidity risk). A sound ALM process integrates

strategic, profitability, and net worth planning with risk management. Examiners review (a)

interest rate risk sensitivity and exposure; (b) reliance on short-term, volatile sources of

funds, including any undue reliance on borrowings; (c) availability of assets readily

convertible into cash; and (d) technical competence relative to ALM, including themanagement of interest rate risk, cash flow, and liquidity, with a particular emphasis on

assuring that the potential for loss in the activities is not excessive relative to its capital. ALM

covers both interest rate and liquidity risks and also encompasses strategic and reputation

risks.

SENSITIVITY

Sensitivity to market risk, the "S" in CAMELS is a complex and evolving measurement area.

It was added in 1995 by Federal Reserve and the OCC primarily to address interest rate risk,

the sensitivity of all loans and deposits to relatively abrupt and unexpected shifts in interest

rates. In 1995 they were also interested in banks lending to farmers, and the sensitivity of

farmers ability to make loan repayments as specific crop prices fluctuate. Unlike classic ratio

analysis, which most of CAMELS system was based on, which relies on relatively certain,

historical, audited financial statements, thisforward lookapproach involved examining

various hypotheticalfuture price and rate scenarios and then modelling their effects. The

variability in the approach is significant.
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DUPONT ANALYSIS

DuPont analysis (also known as the dupont identity, DuPont equation, DuPont Model or

the DuPont method) is an expression which breaks ROE (Return On Equity) into three parts.

The name comes from the DuPont Corporation that started using this formula in the 1920s.

ROE ANALYSIS

The Du Pont identity breaks down Return on Equity (that is, the returns that investors receive

from the firm) into three distinct elements. This analysis enables the analyst to understand the

source of superior (or inferior) return by comparison with companies in similar industries (or

between industries).

The Du Pont identity is less useful for industries, such as investment banking, in which the

underlying elements are not meaningful. Variations of the Du Pont identity have been

developed for industries where the elements are weakly meaningful.

Du Pont analysis relies upon the accounting identity, that is, a statement (formula) that is by

definition true.

ROA & ROE RATIO

The return on assets (ROA) ratio developed by DuPont for its own use is now used by

many firms to evaluate how effectively assets are used. It measures the combined effects of

profit margins and asset turnover.

The return on equity (ROE) ratio is a measure of the rate of return to

stockholders. Decomposing the ROE into various factors influencing companyperformance is often called the Du Pont system.
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WHY IT MATTERS

The DuPont Analysis is important determines what is driving a company's ROE; Profit

margin shows the operating efficiency, asset turnover shows the asset use efficiency,

and leverage factorshows how much leverage is being used.

The method goes beyond profit margin to understand how efficiently a company's assets

generate sales orcash and how well a company uses debt to produce incremental returns.

Using these three factors, a DuPont analysis allows analysts to dissect a company, efficiently

determine where the company is weak and strong and quickly know what areas of the

business to look at (i.e. inventory management, debt structure, margins) for more answers.

The measure is still broad, however, and is not a substitute for detailed analysis.

The DuPont analysis looks uses both the income statement as well as the balance sheet to

perform the examination. As a result, major asset purchases, acquisitions, or other significant

changes can distort the ROE calculation. Many analysts use average assets and

shareholders' equity to mitigate this distortion, although that approach assumes the balance

sheet changes occurred steadily over the course of the year, which may not be accurate either.
http://www.investinganswers.com/financial-dictionary/businesses-corporations/profit-margin-5116http://www.investinganswers.com/financial-dictionary/businesses-corporations/profit-margin-5116http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/asset-2278http://www.investinganswers.com/financial-dictionary/debt-bankruptcy/leverage-61http://www.investinganswers.com/financial-dictionary/businesses-corporations/factor-5492http://www.investinganswers.com/financial-dictionary/businesses-corporations/sale-5682http://www.investinganswers.com/financial-dictionary/businesses-corporations/cash-5011http://www.investinganswers.com/financial-dictionary/debt-bankruptcy/debt-5752http://www.investinganswers.com/financial-dictionary/businesses-corporations/factor-5492http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/analyst-5331http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/inventory-management-5999http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/income-statement-1104http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/balance-sheet-1083http://www.investinganswers.com/financial-dictionary/stock-market/equity-5038http://www.investinganswers.com/financial-dictionary/businesses-corporations/year-5717http://www.investinganswers.com/financial-dictionary/businesses-corporations/year-5717http://www.investinganswers.com/financial-dictionary/stock-market/equity-5038http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/balance-sheet-1083http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/income-statement-1104http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/inventory-management-5999http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/analyst-5331http://www.investinganswers.com/financial-dictionary/businesses-corporations/factor-5492http://www.investinganswers.com/financial-dictionary/debt-bankruptcy/debt-5752http://www.investinganswers.com/financial-dictionary/businesses-corporations/cash-5011http://www.investinganswers.com/financial-dictionary/businesses-corporations/sale-5682http://www.investinganswers.com/financial-dictionary/businesses-corporations/factor-5492http://www.investinganswers.com/financial-dictionary/debt-bankruptcy/leverage-61http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/asset-2278http://www.investinganswers.com/financial-dictionary/businesses-corporations/profit-margin-5116http://www.investinganswers.com/financial-dictionary/businesses-corporations/profit-margin-5116


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CHAPTER II

INDUSTRY PROFILE


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2.1 INDIAN BANKING SECTOR

Over the past couple of years, the Indian banking sector has displayed a high level of

resiliency in the face of high domestic inflation, rupee depreciation and fiscal uncertainty in

the US and Europe. In order to stimulate the economy and support the growth of banking

sector, the Reserve Bank of India (RBI) adopted severe policy measures such as increasing

the key monetary policy rates such as repo and reverse repo 16 times since April 2009 and

tightening provisioning requirements. Amidst this economic scenario, the key challenge for

the Indian banking system continues in improving their operational efficiency and implement

prudent risk management practices. Some of the key trends expected to emerge in the near

future are as under:-

ECONOMY SLOWDOWN LIKELY TO IMPACT THE DEMAND FOR CREDIT

High interest rates, subdued industrial production and domestic consumption impacted the

growth of the Indian economy which slowed down from 8.4% in FY11 to 6.5% during

FY12.The scheduled commercial banks (SCBs) overall credit grew at a slower pace during

FY12 at 17% y-o-y as compared to 21.5% registered during FY11.As per the recent RBI data,

the non-food bank credit increased by 15.5% in Oct2012 over its corresponding month

previous year, as compared to 18.2% witnessed in Oct2011 over its corresponding month

previous year. Similarly, credit to industry and services sector recorded a slower growth of

15.2% and 13.7% respectively as against 23.1% and 18.4% during the same period. As per

RBIs second quarter review of monetary policy for FY13, the GDP growth estimates for

FY13 is revised downwards from 6.5% forecasted earlier to 5.8%.Any further slowdown in

the Indian economic growth is likely to impact the demand for bank credit.

RBI MAY LOWER KEY POLICY RATES, IF INFLATIONARY PRESSURES EASE

Inflation continued to remain sticky and much above the RBIs comfort zone throughout the

year. In fact headline inflation as measured by WPI remained above 7.5% from Feb to Oct

2012. As a result the RBI has kept the repo rate at an elevated level, reducing it by 50 basis

points only once during 2012, in April-12 to support growth.

However, in order to support the flow of funds to the productive sectors of the economy and

ease the liquidity crunch in the banking system the RBI has cut the CRR by 175basis points


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during the course of the year which stands at 4.25%, as on Nov 2012. Given the easing of

international commodity prices, particularly of crude, decline in core inflation as demand

conditions moderate, there has been some steady moderation in inflation in the recent period.

As a result the RBI might decide to ease the policy rate furthermore.

ASSET QUALITY WILL NEED TO BE CLOSELY MONITORED

During FY12, asset quality of banks was severely impaired, as revealed by the steep increase

in non-performing assets (NPAs) of SCBs, particularly for public sector banks (PSBs) owing

to their significant exposure to troubled sectors such as power, aviation, real estate and

telecom. There was a significant increase noted in the NPA levels during FY12. Gross NPAs

value recorded a y-o-y growth of 45.3% and net NPAs registered a y-o-y growth of 55.6%

during FY12. As per RBI, this increase was due to inadequate credit appraisal process

coupled with unfavourable economic situation in the domestic as well as foreign market.

Apart from increase in NPAs, the weakening asset quality trend was also apparent from the

significant increase in restructured assets. Restructured standard advances of the SCBs,

recorded a y-o-y growth of around 58.5% during FY12 and the ratio of restructured standard

advances to gross advances also increased from about 3.5% in FY11 to 4.7% in FY12.

As per the recent data available with CDR cell as on Sep 2012, a total of 466 cases have been

referred to the cell, with 327 cases amounting to Rs. 1,873.9 bn have been approved since the

start of CDR mechanism. Of the total cases referred, 64 cases corresponding to Rs. 311.2 bn

were under finalisation of restructuring packages as on Sep 2012 as compared to 34 cases

amounting to Rs. 264.5 bn as on Sep 2011.

The slowdown in the economy increases in the risk of default and restructuring of loans can

increase which could further lead to deterioration of asset quality. However, implementation

of stringent policies could prevent a sharp deterioration in asset quality.


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MORE IMPETUS ON FEE BASED AND NON-INTEREST INCOME SERVICES

Traditionally, banks have derived limited income from fee based services such as wealth

management, credit card services, treasury services, investment banking and advisory

services. However, as the economy is showing signs of slowdown and the demand for credit

is slowed banks are struggling to keep their margins intact. Also, with changing times,

consumer needs have changed with various avenues of investment available. This is likely to

increase banks focus on offering fee based services as the earnings from such services are

more stable than interest bearing products and it also helps in mitigating risk via

diversification of products and services.

FINANCIAL INCLUSION TO PLAY A KEY ROLE IN THE NEAR FUTURE

As per census 2011, huge section of Indian population is still unbanked. The overall

percentage of households availing banking services in India stood at around 59% as on 2011,

which means still over 40% of total households, lacks access to formal banking services. This

is largely driven by rural areas and/or low income group (LIG) population, due to their

financial illiteracy, low level of income and savings, lack of collateral and absence of

verifiable credit history.

Thus, in recent years, the RBI and Government of India have increased its focus on providing

formal banking/financial services to the huge unbanked population. It is encouraging banks to

develop low cost products and services designed to suit the requirements of this group of

population.

RBI has undertaken several policy initiatives to promote financial inclusion, such as

encouraging opening of no-frills accounts, engaging intermediaries to provide financial and

banking services. In the course of action, there has been increase in number of no-frill

accounts from 50.3 mn in FY10 to 105.5 mn in FY12, registering a CAGR of 44.8% during

this period. Similarly, the number of business correspondent (BC) agents also noted a CAGR

of 70.2% during the same period.


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RBI also advised banks to allocate minimum 25% of the total new branches in unbanked

rural centres during a year. In the process, the number of banking outlets in villages with

population above 2,000 and less than 2,000 also witnessed a CAGR of 73.5% and 55.7%

during FY10 to FY12.

Further, in India there are several micro-finance institutions (MFIs) and self-help groups

(SHGs) which lend credit to the LIG. This is expected to play a significant role in achieving

financial inclusion by extending credit to the LIG.

BANKS WILL EXPAND IN OVERSEAS MARKET

In order to sustain the business growth amid highly competitive market and slowing Indian

economy, banks are likely to expand in the overseas market. They will try to tap emerging

opportunities by expanding into newer markets such as Africa, former Soviet region and

other South East Asian countries, in which India has maintained good trade relations. They

can set up captive operations or expand through inorganic means by undergoing M&A with

banks in foreign countries. However, high capital cost for setting up foreign operations can

act a deterrent in the way of expansion.

MOBILE BANKING, NEXT MAJOR TECHNOLOGICAL LEAP

With the adoption of technology, the Indian banking sector has undergone significant

transformation from local branch banking to anywhere-anytime banking. Over the past

couple of years, there has been huge growth registered in the number of transactions done

through mobile devices. As per RBI, there were 49 banks with a customer base of about 13

mn offering mobile banking services as at the end of Mar 2012. During FY12, around 25.6

mn mobile banking transactions valued at Rs. 18.2 bn were transacted, recording a growth of

198% y-o-y and 174% y-o-y respectively. This rapid growth is driven by availability of

3G/4G network, increasing number of smart phones and several telecom companies offering

economical data usage packages.

In order to encourage cashless transactions, particularly for small value transactions, the RBI

raised the cap on mobile banking without end-to-end encryption from Rs. 1,000 to Rs.5,000.


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Further, the transaction limit of Rs. 50,000 per customer per day was removed, by permitting

banks to fix the transaction limits based on their own risk perception.

In the near term, it is expected to emerge as one of the most preferred medium for banking

transactions.

COMPETITION SET TO INTENSIFY

In Aug 2011, the RBI drafted guidelines for licensing of new banks in the private sector.

Thus, with the entry of new players in the market, competition among banks will increase.

This is expected to benefit the consumers in the long-run as with increased competition banks

will adopt fresh strategies to retain and attract customers and protect their market share. For

instance, increasingly banks are tying up with insurance companies to sell insurance products.

In this business model, both bank and insurance companies share the commission.

Further, with the deregulation of savings rate in Oct 2011, competition among banks has

already intensified.

Passage of Banking Laws (Amendment) Bill aimed at attracting more foreign investments

With an aim to reform and strengthen Indias banking sector, the Lok Sabha passed the

Banking Amendment Bill in Dec 2012, it will pave way for RBI to issue new banking

licenses to private sector and attract more foreign investments in the sector.

The Bill also proposes to enhance the voting rights of investors in case of both public sector

and private sector banks from existing 1% to 10% of public sector banks and from 10% to

26% of private sector banks. This move will attract more foreign investment in the sector.

The Competition Commission clause in the new Bill allows the RBI to continue with its role

as the banking regulator, while the Competition Commission of India (CCI) will regulate

mergers and acquisitions (M&A) and will have powers to investigate and clear M&As in the

banking sector.

Moreover, the bill has a clause, which will allow foreign banks to convert their Indian

operations into local subsidiaries or transfer its shareholding to a holding company of the

bank without paying stamp duty.


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CHAPTER III

COMPANY PROFILE


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3.1 INTRODUCTION

Pramartha is a risk consulting firm with expertise in actuarial, quantitative and

analytics practices. Pramartha is one of the few Indian firms working in the wider area of

Actuarial Applications Enterprise Risk Management Quantitative Techniques and Analytics.

The Company has developed in house tools and techniques to access a company's risks

across sectors and geographies. With their in depth expertise in formulating cutting edge

strategies they convert business risk into opportunity.

Vision: To be a Global leader in Risk Management and Consulting

MANAGEMENT

Founder and Managing Director

Mahidhara Davangere V. MBA, MFC, MSc (Maths), DAT (UK), AIA

Mahidhara is an Associate Actuary and a Risk consultant. He is the Founder of Pramartha

and has over a decade of extensive experience in Research and financial valuation covering

industries like Banking, Insurance and financial sectors in India, South Africa and other

emerging African markets. Also, has experience in US Mortgage industry. His expertise lies

in commercializing innovative ideas to practical realities. He is an eloquent speaker and is

passionate about Mathematics and Art.

Board of Advisors:

Drew K Wilson

Drew is currently the Founder and Principal of Turnstone Applied Research based in

Australia. He has 20+ years growing Investment and Wealth management businesses across

institutional and retail sectors in Australia, India & Canada. Prior to starting his own firm he

co founded Atom Funds Management, an Australian Small Cap Investment Boutique with

offices in Sydney and Bangalore. He raised $ 75 million in institutional mandates and retail


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FUM for Atom. He also launched Fat Fund, a $30 million Listed investment company on

the ASX.

R. Krishnan

Krishnan joined SBI as a Sportsman in 1974 and worked as banker with State Bank of India

(SBI) with more than 25 years of experience in Credit Management and implementation of

Asset Liability Management (ALM). He also worked as the Secretary of Local Chapter of

Indian Institute of Bankers for a period of about 3 years. From 2001 to 2009 he was

connected with Bangalore Baptist hospital in the as a financial advisor and Auditor. He is

currently a visiting faculty to various B-Schools like Mount Carmel, Sheshadripuram

College, Global Institute of Management, Acharya Institute of Management in the areas

pertaining to Banking, Finance, and Hospital management. He was a Hockey Player and is

passionate about Cricket, Music and Philately.

Pattabhi B. N. M.Com FCA

Pattabhi is a Chartered Accountant and is presently partner in M/s Parimal Ram & Pattabhi,

Chartered Accountants, Bangalore. He has 10 plus years of experience in auditing and

taxation. He has also been instrumental in various M&A activities for his clients in India and

US. He also acted as an advisor to Government of Karnataka, Department of Pre-University

Education in setting the new syllabus for I and II PUC. He is also a visiting faculty to various

prestigious B-Schools in India. His hobbies are swimming and numerology.

Pundi Narasimham

Pundi is an American citizen, a serial entrepreneur, having built and sold many companies in

last three decades in North America and Asia Pacific Region covering India, Malaysia and

Philippines. He represented the Fulton county and city of Valdosta in the state of Georgia, US

to promote bilateral trade & service between India and US. He has diverse experience in the

area of Life Sciences, Bio Technology, Analytics and Risk Management, IT staffing and

Knowledge Process Outsourcing. He has steered the acquisition of many IT companies in

US. He has also published 14 research papers and 4 US Patents in the area of optical fibre

research.


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Praveen Kumar. P

Praveen is an Investment analyst working in Sanlam Equity Analytics, India. He has eight

years of experience in the field of investment and finance. He has analyzed stocks in various

sectors like capital goods, mining, banking and utilities across countries like Australia, Africa

and Asia Pacific Regions. He has also worked as a quant analyst and has been a part of

development of financial softwares. He is passionate about Photography and Investments.


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CHAPTER IV

RESEARCH METHODOLOGY


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4.1 TITLE OF THE STUDY

Comparative Analysis of Risk Capital in both Public and Private Banking Sectors based on

Basel II

4.2 STATEMENT OF THE PROBLEM

In analyzing the Risk of the bank, a Risk Matrix has to be prepared, in the process of

preparation there is a need to analyze the risk capital for both public and private sector banks.

4.3 OBJECTIVES OF THE STUDY

1. To analyze Capital Risk borne by different banks.2. To gain knowledge on how banks are able to manage Risk by using Capital Adequacy.3. To analyze the financial indicators by DuPont model.

4.4 SCOPE OF THE STUDY

The scope of the study is that I have only considered Risk capital i.e. the Pillar- I under

BASEL- II and in the components of capital only Tier-I and Tier-II is considered.

4.5 DATA COLLECTION

The data can be of two types:

Primary Data Secondary Data

Secondary Data are those data which are already collected and stored and which has

been passed through statistical research. In this project, data has been collected from

following sources:-

Annual Reports Books Magazines


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4.6 LIMITATIONS OF THE STUDY

Due to the limited time period the project is done based on taking the single bank inboth public and private sector.

It could have been better if DuPont analysis is done to all the banks in public andprivate sectors.


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CHAPTER V

DATA ANALYSIS AND

INTERPRETATION


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CAPITAL ADEQUACY RATIO

Capital adequacy ratios are a measure of the amount of a bank's capital expressed as a

Percentage of its risk weighted credit exposures.

TABLE: 2

BANKS TIER- 1 TIER-2

TOTAL CAPITAL

ADEQUACY RATIO

SBI 9.79% 4.07% 13.86%

PNB 9.28% 3.35% 12.63%

CANARA 10.35% 3.41% 13.76%

BOI 8.59% 3.36% 11.95%

AB 9.13% 3.73% 12.83%

OVERALL SCENARIO OF PUBLIC SECTOR:

GRAPH: 1

0

20000

40000

60000

80000

100000

120000

COMPARISON OF TIER 1 CAPITAL


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GRAPH: 2

GRAPH: 3

INTERPRETATION:

RBI raised the minimum regulatory CRAR requirement to 9%. As seen in the above graph all banks are maintaining above 9%. All the banks are maintaining a cushion of 3-5% extra which seems to be a good sign. As CRAR is high, it helps the bank in maintaining its time liabilities and other risks

such as credit, operations.

From the above graph, we can clearly see that SBI has the highest CRAR followed byCanara Bank and the lowest is BOI, so SBI has the added advantage to maintain its

risks.

Canara Bank has the highest tier 1 Capital Adequacy Ratio which means that it canabsorb higher risks than the other banks.

0

10000

20000

30000

40000

50000

SBI CANARA PNB BOI ALLAHABAD

BANK

COMPARISION OF TIER 2 CAPITAL

sbi pnb canara BOI AB

tier 1 9.79% 9.28% 10.35% 8.59% 9.13%

tier 2 4.07% 3.35% 3.41% 3.36% 3.73%

total cap adequecy ratio 13.86% 12.63% 13.76% 11.95% 12.83%

OVERALL PUBLIC SECTOR


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PRIVATE SECTOR BANKS:

OVERALL PRIVATE SECTOR:

GRAPH: 4

GRAPH: 5

HDFC ICICI AXIS KOTAK YES

TIER 1 CAPITAL 2867137 56498 27079.97 20592.12 9912.2

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

AMOUNTINCRORES

TIER 1 CAPITAL

HDFC ICICI AXIS KOTAK YES

TIER 2 CAPITAL 1227078 30021 9772.62 7916.37 4023.02

0

200000

400000

600000

800000

1000000

1200000

1400000

AMOUNTINCRORES

TIER 2 CAPITAL


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GRAPH: 6

INTERPRETATION:

RBI raised the minimum regulatory CRAR requirement to 9%, as seen in the abovegraph all banks are maintaining above 9%.

From the above graph, we can clearly see that ICICI has the highest CRAR followedby YES Bank and the lowest is Axis Bank, so ICICI has the added advantage tomaintain its risks.

Kotak Mahindra Bank has the highest tier 1 Capital Adequacy Ratio which means thatit can absorb higher risks than the other banks.

Axis Hdfc Icici Kotak Yes

tier 1 9.45% 11.60% 12.68% 13.90% 9.90%

tier 2 4.21% 4.90% 5.84% 1.50% 8%

Total Capital adequecy ratio 13.66% 16.50% 18.52% 15.40% 17.90%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

OVERALL PRIVATE SECTOR


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The capital structural position of the banks can be analyzed using the following ratios:

1. DEBT EQUITY RATIO2. FUNDED DEBT TO CAPITALIZATION RATIO3. SOLVENCY RATIO

Analysis of Debt Equity Ratio:

It basically indicates the relationship between loan and the net worth of company,which is known as gearing.

If the proportion of the debt to the equity is low, a company is said to be low geared,and vice-versa.

A debt equity ratio of 2:1 is normally accepted. The higher the gearing, the morevolatile the return to the shareholders.

Debt-Equity Ratio = Long term debt / Shareholders funds or Net worthGRAPH: 7

GRAPH: 8

sbi pnb canara boi abd

D/E ratio 13.03276344 14.98549632 15.09826901 16.71280268 16.05537466

0

2

4

6

8

1012

14

16

18

D/E ratio

AXIS HDFC ICICI KOTAK YES

D/E ratio 11.14389479 9.091851415 6.56545712 6.908127682 15.13132461

0

5

10

15

20

D/E ratio


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INTERPRETATION:

As D/E ratio is higher for all banks the shareholders will have less dividend payoutand it shows that higher profits are paid back to creditors as a part of interest.

Even if the EBIDT is high the banks will have less net profit.

Analysis of Funded Debt to Total Capitalization Ratio:

The funded debt to total capitalization ratio establishes the relationship between thelong term fund raised from outsiders and total long term funds available from the

owners of the business.

It explains the capital structure position of the company. Normally the smaller the ratio the better it will be. Total capitalization = Total Debt + Equity

GRAPH: 9

GRAPH: 10

sbi pnb canara boi abd

TOTAL CAPITALIZATION FOR

PUBLIC SECTOR254604.13 444669.83 365269.08 371292.05 179194.17

0

100000200000

300000

400000

500000

TOTAL CAPITALIZATION FOR PUBLIC

SECTOR

AXIS HDFC ICICI KOTAK YES

TOTAL CAPITALIZATION FOR

PRIVATE SECTOR276,984.51 365,467.72 504,661.08 63,112.79 93,685.41

0.00

100,000.00

200,000.00

300,000.00

400,000.00

500,000.00

600,000.00

TOTAL CAPITALIZATION FOR PRIVATESECTOR


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INTERPRETATION:

In the public sector we observe that SBI has least total capitalization and hence it canhave very less risk to handle and in the private sector we observe that Kotak Mahindra

bank is maintaining less risk.

Analysis of Solvency Ratio:

It shows the relationship between total liabilities to the outsiders to total assets. It provides a measurement of how likely a company will be continue meeting its debt

obligations.

Lower ratio i.e. outsiders liabilities in the total capital of company the better is thelong term solvency of the company.

Different forms of solvency ratios are: Current Ratio, Quick Ratio.1. CURRENT RATIO:

A liquidity ratio that measures a companys ability to pay short-term obligations. TheCurrent Ratio formula is:

GRAPH: 11

GRAPH: 12

SBI PNB CANARA BOI AB

CURRENT RATIO 0.05 0.02 0.03 0.03 0.01

0

0.02

0.04

0.06

AxisTitle

CURRENT RATIO

HDFC ICICI AXISKOTAK

MAHINDRAYES

CURRENT RATIO 0.08 0.13 0.03 0.05 0.08

0

0.05

0.1

0.15

AxisTitle

CURRENT RATIO


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INTERPRETATION:

In the public and private sectors all the banks are having the ratios < 1 hence itsuggests that the company would be unable to pay off its obligations if they came due

at that point. While this shows the company is not in good financial health, it does not

necessarily mean that it will go bankrupt - as there are many ways to access financing

but it is definitely not a good sign.

2. QUICK RATIO: It measures the ability of a company to use its near cash or quick assets to extinguish

or retire its current liabilities immediately.

It includes those current assets that presumably can be quickly converted to cash Quick Ratio = (Cash equivalents + Short term investments + Accounts receivable ) /

Current liabilities

GRAPH: 13

GRAPH: 14

SBI PNB CANARA BOI AB

QUICK RATIO 12.05 23.81 29.11 20.79 32.65

0

10

20

30

40

AxisTitle

QUICK RATIO

HDFC ICICI AXIS

KOTAK

MAHINDR

A

YES

QUICK RATIO 6.2 16.71 21.63 16.85 17.83

0

5

10

15

20

25

AxisTitle

QUICK RATIO


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INTREPRETATION:

In public sector AB bank has the higher quick ratio and in private sector Axis Bankhas the higher quick ratio it reflects that more likely the banks are be able to pay its

short term bills.

The CAMEL Framework helps to measure banks performance through five different

categories. The CAMEL Framework is:

(1) Capital adequacy ratio

(2) Asset quality

(3) Management quality

(4) Earnings performance and

(5) Assessing liquidity

1. CAPITAL ADEQUACY RATIO:TABLE: 3

BANK 2012 2011

SBI 13.86% 11.98%

ICICI 18.5% 19.5%

COMPARISION OF PUBLIC VS PRIVATE SECTOR:

PUBLIC SECTOR: SBI

PRIVATE SECTOR: ICICI

GRAPH: 15

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

2012 2011

SBI

ICICI


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INTERPRETATIONS:

ICICI pays lesser dividends than SBI, thereby improving their Tier-1 CapitalAdequacy Ratio which in turn improves the overall CRAR.

In future ICICI can sustain to any kind of risks when compared with SBI because itsTier-1 and CRAR is very high.

It also indicates that ICICI is very cautious about the future as it knows that themarket is dynamic.

2. ASSET QUALITY:

FOR 2011-12

TABLE: 4

NPA TOTAL ASSETS NPA IN % OF

ASSETS

SBI 15819 1335519 1.18%

ICICI 1894 473647 0.39%

FOR 2010-2011

NPA TOTAL ASSETS NPA IN % OF

ASSETS

SBI 12347 1223736 1.01%

ICICI 2458 406234 0.60%

GRAPH: 16

1.18%1.01%

0.39%0.60%

0.00%

0.50%

1.00%

1.50%

2012 2011

NPA IN % OF ASSETS

SBI

ICICI


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INTERPRETATION:

For SBI the management efficiency of the bank has been commendable. It can also explains the amount of provisioning done to decrease the percentage of

NPA from books of accounts aligning to the RBI norms However NPA has piled up in ICICI books of accounts which are the worrying things

for the management as it directly hits the profitability of the bank.

3. MANAGEMENT QUALITY:TABLE: 5

FOR 2011-12

OPERATING

PROFITS

TOTAL ASSETS RATIO OF

OPERATING

PROFITS TO

TOTAL ASSETS (%)

SBI 31574 1335519 2.36%

ICICI 10386 473647 2.19%

FOR 2010-11

OPERATING

PROFITS

TOTAL ASSETS RATIO OF

OPERATING

PROFITS TO

TOTAL ASSETS (%)

SBI 25336 1223736 2.07%

ICICI 9048 406234 2.22%


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GRAPH: 17

INTERPRETATION:

The profits are increasing for SBI and for the ICICI the profits are decreased this canbe clearly see from the above graph.

This means that SBI is better utilizing their assets to generate profit than ICICI.

TABLE: 6

FOR 2011-12

OPERATING

EXPENSE

TOTAL EXPENSE RATIO OF

OPERATING

EXPENSE TO

TOTAL EXPENSE

(%)

SBI 26068 109186.89 23.87%

ICICI 78504 34985.50 224.39%

2012 2011

SBI 2.36% 2.07%

ICICI 2.19% 2.22%

1.90%

2.00%

2.10%

2.20%

2.30%

2.40%

AxisTitle

RATIO OF OPERATING PROFITS TO

TOTAL ASSETS (%)


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FOR 2010-11

OPERATING

EXPENSE

TOTAL EXPENSE RATIO OF

OPERATING

EXPENSE TO

TOTAL EXPENSE

(%)

SBI 23015 88959.12 25.87%

ICICI 34985.50 27931.58 125.25%

GRAPH: 18

INTERPRETATION:

Increase in the ratio means that the ICICI bank has incurred more expenses due totheir operations than the previous year.

This ratio in case of SBI has decreased slightly, this shows that SBI have improvedtheir operational efficiency.

2012 2011

SBI 23.87% 25.87%

ICICI 224.39% 125.25%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

AxisTitl

e

RATIO OF OPERATING EXPENSE TO

TOTAL EXPENSE (%)


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4. EARNINGS PERFORMANCE:

To assess the earnings performance of a bank, it will be helpful to look at a variety of ratios

and measures; these include:

(1) Return on equity (ROE),

(2) Return on assets (ROA) and

(3) Net interest margin to total assets.

FOR SBI:

TABLE: 7

2011-12 2010-11

ROE (%) 14.36% 12.84%

ROA (%) 0.88% 0.71%

NIM TO TOTAL ASSETS

(%)

3.85% 3.32%

FOR ICICI:

2011-12 2010-11

ROE (%) 11.1% 9.58%

ROA (%) 1.5% 1.34%

NIM TO TOTAL ASSETS

(%)

2.73% 2.64%


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GRAPH: 19

INTERPRETATION:

Here ROE has increased because ROA has also been increased. When compared with ICICI, SBI is having a high ROE and as a result the

shareholders will receive a better return on their investment.

While coming to ROA it is higher for ICICI and therefore we can say that themanagement is effectively utilizing the companys assets to generate profit.

SBI and ICICI have the positive net interest margin means the investment strategypays more interest than it costs.

It can be broken in three main parts:

(1)Profit margin, (2) Asset turnover, and (3) Equity multiplier.

TABLE: 8

FOR 2011-12

NET PROFIT REVENUE PROFIT MARGIN

(%)

SBI 11707 120872.90 9.68%

ICICI 6465.26 41450.75 15.59%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%1.40%

1.60%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%14.00%

16.00%

SBI ICICI SBI ICICI

DuPont Analysis

ROE (%)

NIM TO TOTAL

ASSETS (%)

ROA (%)


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FOR 2010-11

NET PROFIT REVENUE PROFIT MARGIN

(%)

SBI 8265 96329.45 8.57%

ICICI 51513 33082.96 1.55%

GRAPH: 20

INTERPRETATION:

For Both the banks the Profit margin increased, while if we consider SBI the profitmargins are constantly improving and it is a good sign for the bank.

While ICICI has increased its profit margin by a huge percentage and from overall forboth the banks they have strong operating management.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

2012 2011

PROFIT MARGIN (%)

SBI

ICICI


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TABLE: 9

FOR 2011-12

REVENUE ASSETS ASSET TURNOVER

(%)

SBI 41450.75 473647 8.75%

ICICI 120872.90 1335519 9.05%

FOR 2010-11

REVENUE ASSETS ASSET TURNOVER

(%)

SBI 96329.45 1223736 7.87%

ICICI 33082.96 406234 8.14%

GRAPH: 21

7.20%

7.40%

7.60%

7.80%

8.00%

8.20%

8.40%

8.60%

8.80%

9.00%

9.20%

2012 2011

ASSET TURNOVER (%)

SBI

ICICI


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INTERPRETATION:

Here SBI is having higher the ratio and thereby we can say that it is having lessfinancial leverage.

While ICICI has the lesser ratio thereby it will have high financial leverage whencompared with SBI.

5. ASSESSING LIQUIDITYTABLE: 11

FOR 2011-12

CURRENT RATIO QUICK RATIO

SBI 0.05 12.05

ICICI 0.13 16.71

FOR 2010-11

CURRENT RATIO QUICK RATIO

SBI 0.04 8.50

ICICI 0.11 15.86

INTERPRETATION:

Current Ratio for SBI has increased that means SBI is more capable of payingits obligations and for ICICI it is much higher so it is giving a sense that the

ability to turn its product into cash is very good.

Quick Ratio for both the banks is good. But when compared to SBI, ICICI hasa better advantage of meeting the short term obligations by its most liquid

assets.


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[50]

CHAPTER VI

FINDINGS, SUGESSIONS

AND

CONCLUSIONS


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[51]

6.1 FINDINGS

Capital adequacy ratio is important for a bank because it has to safeguard theirdepositors.

If the banks wants to be risk free then it has to have a high Capital adequacy ratio. Tier-I capital will play a key role in absorbing losses because it is the core capital that

is readily available with the bank.

Risk management plays a key role in the banks performance. DuPont analysis helps in giving an insight that exactly which part of the bank is not

performing.

6.2 SUGGESTIONS

Banking industry in India is undergoing aggressive growth. So that banks needsto maintain adequate regularity capital so as to protect itself from various types

of risk such as credit risk, market risk and operational risk

Basel II norms provide the banks to improve the risk management process. Sobanks should follow the Basel II norms strictly.

Apart from stipulated rate of 9% CRAR banks are required to maintain 6%core CRAR. For this strong equity capital base should be sustained other than

external and sub ordinate debts.

Employees should be given proper training in order to cope up with thechanging stipulations under Basel accord

IT infrastructure in the banks need to be more supportive for theimplementation of Basel II accord

Investment portfolio of the bank should be designed taking into considerationthe risk weight concerted with each and every investment opportunity

Minimize lending loans and advances to lower rated and unrated companiessince they fetch higher risk weights


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6.3 CONCLUSION

Finally analyzed the Capital Risk borne by different banks using Capital Adequacy Ratio,

Debt-Equity Ratio, Current and Quick Ratios and gained knowledge on why Capital

Adequacy Ratio is important for the banks and thereby analyzed the financial indicators

of SBI and ICICI by DuPont Analysis and found out that SBI is the best performing bank

out of all banks in both public and private banking sectors.


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CHAPTER VII

BIBLIOGRAPHY


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7.1 WEBSITES

1. www.sbi.co.in2. www.icici.com3. www.rbi.org.in4. www.google.comoccasionally for any doubts relating to the topic.
http://www.icici.com/http://www.icici.com/http://www.rbi.org.in/http://www.rbi.org.in/http://www.google.com/http://www.google.com/http://www.google.com/http://www.rbi.org.in/http://www.icici.com/

Documents

Comparitive Analysis of Risk Capital in Both Public