f Project Riddhi

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INTRODUCTION OF BANKING SECTOR

Introduction

Banking in India is as old as the time of Lord Manu. In those

days the landing and borrowing were not made in cash but in kinds.

Thus we can say that The Lord Manu was first universal Banker. Till

then to todays modern banking the activity is witnessed numbers of

changes in banking industries. The origin of the word BANKS is said

to have derived from French word BANCO or BANC which means

bench. Also another view is that BANK is derived from German

word BACK which means joint stock funds.

According to Sec (1) of the Banking Regulation Act 1949,

Banking means accepting, for the purpose of lending or investment,

of deposits of money from the public, repayable on demand or

otherwise and withdrawal by cheque, draft, order or otherwise.

Beside these functions, See 6 of the Act sets out other forms of

business a bank carry on.

The term banking defined in Banking Regulation Act 1949 as

accepting deposit for the purpose of lending or investment of money

from the public repayable on demand or otherwise and withdraw able

by cheques, draft, and order or otherwise. Basically bank accepts

money as deposit and uses them in lending through loan / credit or

invests with a view to earn profit. But now a day in modern banking

the concept has widen and extend their operation through various


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ancillary activities and value added services like insurance etc. The

apart from above the banking services cover cheques collection

facilities, fund remittance / fund transfer facilities, currency exchange

facilities, depository services, treasury operations, to provide safe

custody for articles and valuables, investment and project

consultancy, merchant banking etc.

In Indian economy banking sector is playing very vital role.

Reserve Bank of India is regulating the Indian banks. They are

regulated through Banking Regulation Act, Reserve Bank of India Act

and Company Act. During last few years, the banking industry is

witnessed of numbers of changes in their work and style. Reforms

took placed enable them to compete new entrant as the sector has

liberalized and put open for new private players and their overseas

collaborators. The first phase of financial reforms resulted in the

nationalization of 14 major banks in 1969 and resulted in a shift from

Class banking to Mass banking. This in turn resulted in a significantgrowth in the geographical coverage of banks. Every bank had to

earmark a minimum percentage of their loan portfolio to sectors

identified as priority sectors. The manufacturing sector also grew

during the 1970s in protected environs and the banking sector was a

critical source. The next wave of reforms saw the nationalization of 6

more commercial banks in 1980. Since then the number of scheduled

commercial banks increased four-fold and the number of bank

branches increased eight-fold.

After the second phase of financial sector reforms and

liberalization of the sector in the early nineties, the Public Sector


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Banks (PSB) s found it extremely difficult to compete with the new

private sector banks and the foreign banks. The new private sector

banks first made their appearance after the guidelines permitting

them were issued in January 1993. Eight new private sector banks

are presently in operation. These banks due to their late start have

access to state-of-the-art technology, which in turn helps them to

save on manpower costs and provide better services.

Indian banking classified as under:

1. Commercial Banks (State owned Banks or Nationalized

Banks)

2. Co-operative Banks.

3. Regional Rural Banks.

4. Private Banks.

5. Foreign Banks.

Due to entry of these new players sector became very open

and competitive hence numbers of mergers and acquisition took

place in industry.

The banking is playing significant role in Indian economy.

Indian debt market, financial market, money market, equity markets,

commodity markets etc. have very good impacts of Indian banking,

as the banks in India are playing major role to boost these markets.

Beside these Indian banking contributed in development of trade,

services and industries through credit disbursal. Indian agriculture is


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also developing through banking investment through credit disbursal.

Since the U.P.A. government took charge they focus on agriculture

growth. They asked Indian Banks to double the flow of credit to

agriculture sector within three years time bound program. Keeping in

this aspect in mind I decided to work on this project. For the growth of

agriculture investment the Regional Rural Banks are main tool in

Indian economy as the RRBs posses wider network of branches and

grater connectivity with rural mass. Saurashtra Gramin Bank is such

one of the banks, which is committed to economical development of

the region and has great exposure in agriculture in their operation

area.


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HISTORY OF BANKING

In Rome, the bankers were called Argentarii, Mensaril or

Callybistoe. The banks were called Tabornoe Argentarii. Some ofthe banks carried business on their own account and other were

appointed by the government to receive the taxes. They used to

transact their business on similar lines as those of modern banks.

People used to settle their account with their creditors by giving a

cheque or draft on the bank. If the creditors had also an account was

settled by an order to make the transfer of such money from one

name to another. To pay money by draft was known as Prescriber

and Rescribere and the draft was known as Attributio. These banks

also received deposits and lent money. Loan banks were also

common in Rome.

Although during the early periods, private individual did banking

business, many countries established public banks either for the

purpose of facilitating commerce or to serve the government. The

bank of Venice, established in 1157, is supposed to be the most

ancient bank. Originally, it was not a bank in the modern sense, being

simply an office an office for the transfer of the public debt.

The being of English banking may correctly be attributed to the

London Goldsmiths. They used to receive their customers valuablesand funds or safe custody and issue receipts acknowledging the

same. These notes, in course of time, became payable to bearer on

demand and hence enjoyed considerable circulation. In fact, the

goldsmith got a rude shock by the ill treatment of the government of


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Charles II under the table ministry. However, the ruin of goldsmith

marks turning point in the history of English banking, which resulted

in the growth of private banking and the establishment of the Bank of

England in 1694.

Although the business of banking is as old as authentic history.

Banking institution has since then changed in character and content

very much. They have developed from a few simple operations

involving the satisfaction of a few individuals needs to the

complicated mechanism of modern banking, involving the satisfaction

of the capital seeking employment and providing the very lifeblood of

commerce.


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DEVELOPMENT OF BANKING INDUSTRY

Banking is India has its origin as early as the Vedic period. It isbelieved that the transition from money lending to banking must have

occurred even before, the great Hindu jurist, who has devoted a

section of his work to deposits and advances and laid down rules

relating to rates of interest. During the mogul period, the indigenous

bankers played a pivotal role in lending money and financing foreign

trade and commerce. During the days of East India company.

The general bank of India was the first joint stock bank to be

established in the year 1786. The others, which followed, were the

Bank of Hindustan and the Bengal Bank. The bank of Hindustan is

reported to have continued till 1906 while the other two failed in the

meantime. In the first half of the 19th century the East India Company

established three Banks; Bank of Bengal in 1809, the Bank ofBombay in 1840, and the Bank of Madras in 1843. These three

banks are known as Presidency Banks.

The transformation has been largely brought by the large dose

of liberalization and economic reforms that allowed banks to explore

new business opportunities rather than generating revenues from

conventional streams.

The banking in India is highly fragmented with 30 banking units

contributing to almost 50% of deposits and 60% of revenues. Indian

nationalized banks continue to be the major lenders in the economy


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due to their sheer size and penetrative networks which assure them

high deposits mobilization. The Indian banking can be broadly

categorized into nationalized, private banks and specialized banking

institutions.

Banks in India are dependent, for their resource requirements,

mainly on domestic deposits that are predominantly at fixed rate, Like

many other emerging market economies, credit extension by banks in

India has increased sharply in recent times.


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TYPES OF BANKS

Central Bank:-

Central Bank is apex banking authority in any country. Itusually controls monitory policy and is the lender of last resort in the

event of crisis. They are often charged with controlling the money

supplies, including printing paper money.

Investment Bank:-

It underwrites stock and bonds issues and advises on mergers.

Merchant Bank:-

Merchant banks were traditionally banks, which engaged in

trade financing. The modern definition however, refers to banks,

which provides capital to firms in the forms of shares rather than

loans. Unlike venture capital firms,

Private Bank:-

Private Banks manages the assets of the very rich.

Saving Bank:-

Saving banks writes mortgages exclusively.

Commercial Bank:-

Commercial bank primarily lend to business (corporate

banking)


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OVERVEIW OF SAURASTRA GRAMIN BANK

INTRODUCTION

SGB has been established under the Act Regional Rural Bank

of India 1976 passed by the Central Govt. Due to failure of Co-

operative sector to some extent and very high cost of personnel

expenses of Nationalized Bank, to cater the need of rural people of

banking facilities, Govt. has decided to constitute the Regional Rural

Banks District Wise having rural orientation and professional

approach alike public sector bank with cost consciousness in mind.

There are at present 196 RRBs in all India covering all the districts of

the nation. Most of them now profit making unit with service motto.

Initially RRBs were restricted to cater the need of only targeted

people i.e. small and marginal farmers, small and cottage industries,

small trader, artisans etc. but later on after the banking sector reforms

RRBs have entrusted full form banking role being one of the vital

banking player in Indian Economy.

The term banking has been defined under section 5(B) of the

Banking Regulation Act 1949 as accepting for the purpose of lending

or investment of deposits of money from the public repayable on

demand or otherwise. Basically bank accepts money as deposit and

uses this money to finance/credit or investment and by operation from

these activities to earn for it. Now a days banking has become very

wider and banks carry out various ancillary activities and services


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including insurance etc. The banking services mostly cover apart

from above cheque collection remittance facilities of fund from one

center to another, safe custody of article / documents, safe deposit

lockers, merchant banking, some consultancy, insurance as an agent

for certain financial services, trusteeship etc. In Indian economy the

banking sector is playing very significant role for development as well

as being backbone for the smooth functioning of the economy. In

banking present scenario, public as well as private sector have equal

opportunity to provide their contributions. In public sector there are

nationalized banks as well as RRBs while there are three tiers

cooperative structure functioning in the economy. Regional Rural

Banks are doing well especially catering the need of rural people in

the farthest corners of the country.


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HISTORY & DEVELOPMENT

Saurashtra Gramin Bank has been established under the

Regional Rural Bank Act 1976 passed by the central government of

India. The bank opened on 26th December 1978 with a view to

provide credit facility to poor and down trodden rural mass of region

and provide limited banking service to rural people. Bank had played

very effective role to uplift the poor rural mass. Then bank was

catering the services to targeted people only where very meager

scope was available to make bank viable or profitable. After banking

sector reforms the RRBs were entrusted full form banking role to

make them sustainable. In line with policy Saurashtra Gramin Bank

too have changed their working and became profit-making unit

without loosing its service motto.

The Bank has very good network of 141 full fledge branches 8

satellite offices. The bank has very large asset base mainly

agriculture credit, it also held handsome core deposit of the region.

At present, bank has 141 full fledge and 8 satellite branches in both

the districts. The bank has been sponsored by State bank of India,

share capital belongs to SBI, 15% state govt. and remaining 50%

belongs to Govt. of India. The bank performs all the normal banking

activity according to banking regulation act provision. It is under direct

supervision of national bank for agri. and rural development

(NABARD) and reserve bank of directors consisting 10 members

including chairman. Govt. of India appoints three members. Three by

sponsored bank i.e. state bank of India and three by state govt. these

include also nominee from NABARD, RBI and also experts from


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various fields. The bank has an administrative set up consisting of

chairman, General Manager and various dept. heads viz, advances

dept., planning dept., personnel dept., audit and inspection dept. etc.

at banks head office and branch manager as head at various

branches of the bank.


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BANK MISSION & PROFILE

MISSION

To provide banking facilities to the door step of public living in

remote & rural area & to enable them reap the fruits of globalization.

BANK PROFILE as on 31-3-2009

141 Computerized Branches + 8 Satellite Offices Covering the 7

Districts and 1000 Villages of Saurashtra Region

566 Dedicated & Devoted Work Force.

Total Deposits Rs. 1073.31 Crore (24.54 % Growth)

Total O/S. Advances Rs. 658.56 Crore (20.81 Growth)

Total Business Rs. 1731.67 Crore

Net Profit For The Year 7.25 Crore

Reserves & Surplus Rs. 45.24 Crore

Per Branch Business Rs. 12.28 Crore

Per Employee Business Rs. 3.06 Crore

Total Disbursement For The Year Rs. 486.93 Crore

115411 Kisan Credit Cards

Priority Sector Advances Outstanding 74.49%

Agri. Disbursement 86.39% of Total Disbursal.

Achievement Under AAP 96.58%

Net NPA 0%

Disbursement Growth 11.38% Over Linked.

158 Farmers Club.

Cross selling of 1725 SRI life insurance policy


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MANAGEMENT TEAM, BANKERS & AUDITORS

BOARD OF DIRECTORS

Shri T. S. Sathayanarayana : Chairman

Shri Debashish Sarkar : Dy. Gen. Manager , SBI

Shri Sudhir Dubey : Dy. Gen. Manager (R -1), SBI

Shri R.V.Sharma : Dy. Gen Manager NABARD

Shri P.K.Jain : Asst. Gen. Manager (RBI)

Shri M. K. Verma : Joint Secretary & Director

Shri Himanshu Seth : Dy. Commissioner (CRD)

Shri H. K. Khava : Non Official Director

Shri K. V. Sindhav : Non Official Director

BANKERS

RESERVE BANK OF INDIA STATE BANK OF INDIA

AUDITORS

Chauhan Rai & Shah

Chartered accountant

Rajkot 360 001


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GENERAL INFORMATION OF BANK

Name : SAURASHTRA GRAMIN BANK

Year of establishment : 26th December 1978

GOI notification No. : 1/26/2005

Accounting year : 1st April to 31st March

The head office : S. J. Palace,

Opp.Andh Mahila Vikas Gruh,

Dhebarbhai road,

Rajkot 360 001.

Total branches :131 computerised branches

Working hours : 10:00 A.M. to 5:00 P.M

Transaction time : 10:00 A.M. to 4:00 P.M

Off day : Sunday &govt. holyday

E- Mail :[email protected]
mailto:[email protected]:[email protected]:[email protected]:[email protected]


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CREDIT DISBURSAL IN SGB

Like other bank Saurashtra Gramin Bank too is collecting

deposit from public and lends them to needy people and earns profit

from those operations. Besides these bank parks their surplus fund in

profitable investment avenues and earn more profit. At present bank

has following deposit and advances product.

Deposits:

1. Current Deposit Account scheme.

2. Saving Bank Deposit Scheme.3. Recurring Deposit Scheme.

4. Term Deposit Scheme.

5. Special Term Deposit Scheme.

Advances:

1. Crop Loan to farmers.

2. Loan for farm mechanization.

3. Loan for irrigation purpose.

4. Loan for purchase of milk animal.

5. Loan for purchase of land or for rehabilitation of land.

6. Loan to small and medium entrepreneur.

7. Loan to trades and industries.8. Loan to service sector.

9. Loan for purchase of consumer durables or two wheelers to

working class / service class people.

10. Loan for purchase of two wheelers for farmers.


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11. Loan to transport operators.

12. Loan for the purchase of house building.

13. Loan for education purpose to students.

14. Loan / over draft facilities against banks fix deposit receipt.

15. Loan against RBI bonds.

16. Loan against the security of NSCs / KVPs.

Besides these bank is doing some non-fund fee base services

like issuance of bank guarantee and solvency certificates to

contractors. Credit sanction / disbursal procedure: SGB receives

applications from their operation area people for loan requirements.

Banks officials at branch scrutinized the various aspects of loan

application and if found feasible / viable than put sanction /

recommendation remarks and place before the appropriate sanction

authority for approval. After getting approval prepares sanction letters

prescribing banks usual terms condition and convey the applicants.After executing necessary documents bank disbursed the loan or

release the cash credit limit as the case may be. Bank has organized

very good mechanism to expedite the disposal and delegated

discretionary power at various level officers according to size of the

loan / limit. Thus the bank has very simple procedure for credit

disbursal.


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MARKET SEGMENT OF SGB

The main market segment of Saurashtra Gramin Bank is rural

mass, more particularly the farmers of the region. However the bank

had expanded its network and focused on profit and introduced some

new products the followings are market prospects of bank.

1. Farmers.

2. Rural Artisans.

3. Rural entrepreneur.

4. Small and medium entrepreneur.

5. Traders.

6. Service providers.

7. Contractors.

8. Teachers, Doctors, Lawyers, professionals etc.

9. Other common man who park his surplus with bank in the

form of deposit.Bank is catering these segments by expanding its cliental base.


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CROP FINANCE IS CORE FINANCE IN SGB

Saurashtra Gramin Bank has been established under the Act

Regional Rural Bank (RRB) of India 1976 passed by the Central

Govt. Due to failure of Co-operative sector to some extent and very

high cost of personnel expenses of Nationalized Bank, to cater the

need of rural people of banking facilities, Govt. has decided to

constitute the Regional Rural Banks District Wise having rural

orientation and professional approach alike public sector bank with

cost consciousness in mind. There are at present 196 RRBs in all

India covering all the districts of the nation. Most of them now profit

making unit with service motto. Initially RRBs were restricted to cater

the need of only targeted people i.e. small and marginal farmers,

small and cottage industries, small trader, artisans etc. but later on

after the banking sector reforms RRBs have entrusted full form

banking role being one of the vital banking player in Indian Economy.

Saurashtra Gramin Bank has very good crop loan portfolio, as

the recovery percent is more than 95 % in this segment. The Bank

has encouraged the crop finance in the region at large extent. They

motivated the farmers to avail more and more credit as the bank has

easiest policy and hassle free procedure for it. It is the core business

for S.G.B. as the share of crop finance in total disbursement of

advance is more than 83 %. However risk is there and bank need to

diversified its credit portfolio. But introduction of Rastriya Krishi Bima

Yojana, the national Crop insurance scheme, the risk has been


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minimized. The crop insurance business is very cost effective

business for S.G.B. The bank has issued more than 115411 Kishan

credit cards to the farmers made easy access of agriculture credit.


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INTRODUCTION OF TOPIC

EXECUTIVE SUMMARY

The banking sector has been undergoing a complex, but

comprehensive phase of restructuring since 1991, with a view to

make it sound, efficient, and at the same time forging its links firmly

with the real sector for promotion of savings, investment and growth.

Although a complete turnaround in banking sector performance is not

expected till the completion of reforms, signs of improvement are

visible in some indicators under the CAMEL framework. Under this

bank is required to enhance capital adequacy, strengthen asset

quality, improve management, increase earnings and reduce

sensitivity to various financial risks. The almost simultaneous nature

of these developments makes it difficult to disentangle the positive

impact of reform measures. Keeping this in mind, signs ofimprovements and deteriorations are discussed for the three groups

of scheduled banks in the following sections.


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CAMELS Framework

Supervisory framework, consistent with international norms, covers

risk-monitoring factors for evaluating the performance of banks. This

framework involves the analyses of six groups of

indicators/parameters reflecting the health of financial institutions.

The indicators are as follows:

CAPITAL ADEQUACY

ASSET QUALITY

MANAGEMENT SOUNDNESS

EARNINGS & PROFITABILITY

LIQUIDITY

SENSITIVITY TO MARKET RISK

The whole banking scenario has changed in the very recent

past on the recommendations of Narasimham Committee. Further

BASELL II Norms were introduced to internationally standardize

processes and make the banking industry more adaptive to the

sensitive market risks. The fact that banks work under the most

volatile conditions and the banking industry as such in the booming

phase makes it an interesting subject of study amongst these reforms

and restructuring the CAMELS Framework has its own contribution to

the way modern banking is looked up on now. The attempt here is to

see how various ratios have been used and interpreted to reveal a

banks performance and how this particular model encompasses a

wide range of parameters making it a widely used and accepted

model in todays scenario.


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INTRODUCTION TO THE BANKING REFORMS

In 1991, the Indian economy went through a process of

economic liberalization, which was followed up by the initiation of

fundamental reforms in the banking sector in 1992. The banking

reform package was based on the recommendations proposed by the

Narsimhan Committee Report (1991) that advocated a move to a

more market oriented banking system, which would operate in an

environment of prudential regulation and transparent accounting. One

of the primary motives behind this drive was to introduce an elementof market discipline into the regulatory process that would reinforce

the supervisory effort of the Reserve Bank of India (RBI). Market

discipline, especially in the financial liberalization phase, reinforces

regulatory and supervisory efforts and provides a strong incentive to

banks to conduct their business in a prudent and efficient manner and

to maintain adequate capital as a cushion against risk exposures.

Recognizing that the success of economic reforms was contingent on

the success of financial sector reform as well, the government

initiated a fundamental banking sector reform package in 1992.

Banking sector, the world over, is known for the adoption of

multidimensional strategies from time to time with varying degrees of

success. Banks are very important for the smooth functioning of

financial markets as they serve as repositories of vital financial

information and can potentially alleviate the problems created by

information asymmetries. From a central banks perspective, such


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high-quality disclosures help the early detection of problems faced by

banks in the market and reduce the severity of market disruptions.

Consequently, the RBI as part and parcel of the financial sector

deregulation, attempted to enhance the transparency of the annual

reports of Indian banks by, among other things, introducing stricter

income recognition and asset classification rules, enhancing the

capital adequacy norms, and by requiring a number of additional

disclosures sought by investors to make better cash flow and risk

assessments.

During the pre economic reforms period, commercial banks &

development financial institutions were functioning distinctly, the

former specializing in short & medium term financing, while the latter

on long term lending & project financing.

Commercial banks were accessing short term low cost funds

thru savings investments like current accounts, savings bank

accounts & short duration fixed deposits, besides collection float.

Development Financial Institutions (DFIs) on the other hand, were

essentially depending on budget allocations for long term lending at a

concessionary rate of interest.


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Major Recommendations by the Narasimham Committee

on Banking Sector Reforms

Strengthening Banking System

Capital adequacy requirements should take into account market

risks in addition to the credit risks.

In the next three years the entire portfolio of government

securities should be marked to market and the schedule for the

same announced at the earliest (since announced in the

monetary and credit policy for the first half of 1998-99);

government and other approved securities which are now

subject to a zero risk weight, should have a 5 per cent weight

for market risk.

Risk weight on a government guaranteed advance should be

the same as for other advances. This should be made

prospective from the time the new prescription is put in place.

Foreign exchange open credit limit risks should be integrated

into the calculation of risk weighted assets and should carry a

100 per cent risk weight.


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Minimum capital to risk assets ratio (CRAR) be increased from

the existing 8 per cent to 10 per cent; an intermediate minimum

target of 9 per cent be achieved by 2000 and the ratio of 10 per

cent by 2002; RBI to be empowered to raise this further for

individual banks if the risk profile warrants such an increase.

Individual banks' shortfalls in the CRAR are treated on the

same line as adopted for reserve requirements, viz. uniformity

across weak and strong banks. There should be penal

provisions for banks that do not maintain CRAR.

Public Sector Banks in a position to access the capital market

at home or abroad be encouraged, as subscription to bank

capital funds cannot be regarded as a priority claim on

budgetary resources.

Assets Quality

An asset is classified as doubtful if it is in the substandard

category for 18 months in the first instance and eventually for

12 months and loss if it has been identified but not written off.

These norms should be regarded as the minimum and brought

into force in a phased manner.

For evaluating the quality of assets portfolio, advances covered

by Government guarantees, which have turned sticky, be

treated as NPAs. Exclusion of such advances should be


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separately shown to facilitate fuller disclosure and greater

transparency of operations.

For banks with a high NPA portfolio, two alternative

approaches could be adopted. One approach can be that, all

loan assets in the doubtful and loss categories should be

identified and their realizable value determined. These assets

could be transferred to an Assets Reconstruction Company

(ARC) which would issue NPA Swap Bonds.

An alternative approach could be to enable the banks in

difficulty to issue bonds which could from part of Tier II capital,

backed by government guarantee to make these instruments

eligible for SLR investment by banks and approved instruments

by LIC, GIC and Provident Funds.

The interest subsidy element in credit for the priority sector

should be totally eliminated and interest rate on loans under

Rs. 2 lakhs should be deregulated for scheduled commercial

banks as has been done in the case of Regional Rural Banks

and cooperative credit institutions.


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Prudential Norms and Disclosure Requirements

In India, income stops accruing when interest or installment of

principal is not paid within 180 days, which should be reduced

to 90 days in a phased manner by 2002.

Introduction of a general provision of 1 per cent on standard

assets in a phased manner be considered by RBI.

As an incentive to make specific provisions, they may be made

tax deductible.

Systems and Methods in Banks

There should be an independent loan review mechanism

especially for large borrower accounts and systems to identify

potential NPAs. Banks may evolve a filtering mechanism by

stipulating in-house prudential limits beyond which exposures

on single/group borrowers are taken keeping in view their risk

profile as revealed through credit rating and other relevant

factors.

Banks and FIs should have a system of recruiting skilled

manpower from the open market.


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Public sector banks should be given flexibility to determined

managerial remuneration levels taking into account market

trends.

There may be need to redefine the scope of external vigilance

and investigation agencies with regard to banking business.

There is need to develop information and control system in

several areas like better tracking of spreads, costs and NPSs

for higher profitability, accurate and timely information for

strategic decision to Identify and promote profitable products

and customers, risk and asset-liability management; and

efficient treasury management.

Structural Issues

With the conversion of activities between banks and DFIs, the

DFIs should, over a period of time convert them to bank. A DFI

which converts to bank be given time to face in reserve

equipment in respect of its liability to bring it on par with

requirement relating to commercial bank.

Mergers of Public Sector Banks should emanate from the

management of the banks with the Government as the

common shareholder playing a supportive role. Merger should

not be seen as a means of bailing out weak banks. Mergers


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between strong banks/FIs would make for greater economic

and commercial sense.

Weak Banks' may be nurtured into healthy units by slowing

down on expansion, eschewing high cost funds/borrowings etc.

The minimum share of holding by Government/Reserve Bank

in the equity of the nationalized banks and the State Bank

should be brought down to 33%. The RBI regulator of the

monetary system should not be also the owner of a bank in

view of the potential for possible conflict of interest.

There is a need for a reform of the deposit insurance scheme

based on CAMELs ratings awarded by RBI to banks.

Inter-bank call and notice money market and inter-bank term

money market should be strictly restricted to banks; only

exception to be made is primary dealers. Non-bank parties are

provided free access to bill rediscounts, CPs, CDs, Treasury

Bills, and MMMF.

RBI should totally withdraw from the primary market in 91 days

Treasury Bills.


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BASEL II ACCORD

Bank capital framework sponsored by the world's central banks

designed to promote uniformity, make regulatory capital more risk

sensitive, and promote enhanced risk management among large,

internationally active banking organizations. The International Capital

Accord, as it is called, will be fully effective by January 2008 for banks

active in international markets. Other banks can choose to "opt in," or

they can continue to follow the minimum capital guidelines in the

original Basel Accord, finalized in 1988. The revised accord (Basel II)

completely overhauls the 1988 Basel Accord and is based on three

mutually supporting concepts, or "pillars," of capital adequacy.

The first of these pillars is an explicitly defined regulatory capital

requirement, a minimum capital-to-asset ratio equal to at least 8% of

risk-weighted assets. Second, bank supervisory agencies, such asthe Comptroller of the Currency, have authority to adjust capital levels

for individual banks above the 8% minimum when necessary. The

third supporting pillar calls upon market discipline to supplement

reviews by banking agencies. Basel II is the second of the Basel

Accords, which are recommendations on banking laws and

regulations issued by the Basel Committee on Banking Supervision.

The purpose of Basel II, which was initially published in June 2004, is

to create an international standard that banking regulators can use

when creating regulations about how much capital banks need to put

aside to guard against the types of financial and operational risks


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banks face. Advocates of Basel II believe that such an international

standard can help protect the international financial system from the

types of problems that might arise should a major bank or a series of

banks collapse. In practice, Basel II attempts to accomplish this by

setting up rigorous risk and capital management requirements

designed to ensure that a bank holds capital reserves appropriate to

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.

The final version aims at:

1. Ensuring that capital allocation is more risk sensitive;

2. Separating operational risk from credit risk, and quantifying

both;

3. Attempting to align economic and regulatory capital more

closely to reduce the scope for regulatory arbitrage. While the

final accord has largely addressed the regulatory arbitrage

issue, there are still areas where regulatory capital

requirements will diverge from the economic. Basel II has

largely left unchanged the question of how to actually define

bank capital, which diverges from accounting equity in

important respects. The Basel I definition, as modified up to the

present, remains in place.


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The Accord in operation

Basel II uses a "three pillars" concept

(1) Minimum capital requirements (addressing risk),

(2) Supervisory review and

(3) Market discipline to promote greater stability in the financial

system.

The Three Pillars of Basel II

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.


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The First Pillar

The first pillar deals with maintenance of regulatory capital

calculated for three major components of risk that a bank faces: credit

risk, operational risk and market risk. Other risks are not considered

fully quantifiable at this stage.

The credit risk component can be calculated in three different

ways of varying degree of sophistication, namely standardized

approach, Foundation IRB and Advanced IRB. IRB stands for

"Internal Rating-Based Approach".

For operational risk, there are three different approaches -

basic indicator approach or BIA, standardized approach or TSA, and

advanced measurement approach or AMA. For market risk the

preferred approach is VAR (value at risk).

As the Basel 2 recommendations are phased in by the banking

industry it will move from standardized requirements to more refined

and specific requirements that have been developed for each risk

category by each individual bank. The upside for banks that do

develop their own bespoke risk measurement systems is that they will

be rewarded with potentially lower risk capital requirements. In future

there will be closer links between the concepts of economic profit and

regulatory capital.

Credit Risk can be calculated by using one of three approaches

1. Standardized Approach


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2. Foundation IRB (Internal Ratings Based) Approach

3. Advanced IRB Approach

The standardized approach sets out specific risk weights for

certain types of credit risk. The standard risk weight categories are

used under Basel 1 and are 0% for short term government bonds,

20% for exposures to OECD Banks, 50% for residential mortgages

and 100% weighting on commercial loans. A new 150% rating comes

in for borrowers with poor credit ratings. The minimum capital

requirement is (the percentage of risk weighted assets to be held as

capital) remains at 9%.

For those Banks that decide to adopt the standardized ratings

approach they will be forced to rely on the ratings generated by

external agencies. Certain Banks are developing the IRB approach

as a result.

The Second Pillar

The second pillar deals with the regulatory response to the first

pillar, giving regulators much improved 'tools' over those available to

them under Basel I. It also provides a framework for dealing with all

the other risks a bank may face, such as systemic risk, pension risk,

concentration risk, strategic risk, reputation risk, liquidity risk and

legal risk, which the accord combines under the title of residual risk. It

gives banks a power to review their risk management system.


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The Third Pillar

The third pillar greatly increases the disclosures that the bank

must make. This is designed to allow the market to have a better

picture of the overall risk position of the bank and to allow the

counterparties of the bank to price and deal appropriately. The new

Basel Accord has its foundation on three mutually reinforcing pillars

that allow banks and bank supervisors to evaluate properly the

various risks that banks face and realign regulatory capital more

closely with underlying risks.

The first pillar is compatible with the credit risk, market risk and

operational risk. The regulatory capital will be focused on these three

risks. The second pillar gives the bank responsibility to exercise the

best ways to manage the risk specific to that bank. Concurrently, it

also casts responsibility on the supervisors to review and validate

banks risk measurement models. The third pillar on market discipline

is used to leverage the influence that other market players can bring.

This is aimed at improving the transparency in banks and improves

reporting.


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CAMELS FRAMEWORK

During an on-site bank exam, supervisors gather private

information, such as details on problem loans, with which to evaluate

a bank's financial condition and to monitor its compliance with laws

and regulatory policies. A key product of such an exam is a

supervisory rating of the bank's overall condition, commonly referred

to as a CAMELS rating. This rating system is used by the three

federal banking supervisors (the Federal Reserve, the FDIC, and the

OCC) and other financial supervisory agencies to provide aconvenient summary of bank conditions at the time of an exam.

The acronym "CAMEL" refers to the five components of a

bank's condition that are assessed: Capital adequacy, Asset quality,

Management, Earnings, and Liquidity. A sixth component, a bank's

Sensitivity to market risk was added in 1997; hence the acronym was

changed to CAMELS. (Note that the bulk of the academic literature is

based on pre-1997data and is thus based on CAMEL ratings.)

Ratings are assigned for each component in addition to the overall

rating of a bank's financial condition. The ratings are assigned on a

scale from 1 to 5. Banks with ratings of 1 or 2 are considered to

present few, if any, supervisory concerns, while banks with ratings of

3, 4, or 5 present moderate to extreme degrees of supervisory

concern.


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In 1994, the RBI established the Board of Financial Supervision

(BFS), which operates as a unit of the RBI. The entire supervisory

mechanism was realigned to suit the changing needs of a strong and

stable financial system. The supervisory jurisdiction of the BFS was

slowly extended to the entire financial system barring the capital

market institutions and the insurance sector. Its mandate is to

strengthen supervision of the financial system by integrating oversight

of the activities of financial services firms. The BFS has also

established a sub-committee to routinely examine auditing practices,

quality, and coverage.

In addition to the normal on-site inspections, Reserve Bank of

India also conducts off-site surveillance which particularly focuses on

the risk profile of the supervised entity. The Off-site Monitoring and

Surveillance System (OSMOS) were introduced in 1995 as an

additional tool for supervision of commercial banks. It was introduced

with the aim to supplement the on-site inspections. Under off-site

system, 12 returns (called DSB returns) are called from the financial

institutions, which focus on supervisory concerns such as capital

adequacy, asset quality, large credits and concentrations, connected

lending, earnings and risk exposures (viz. currency, liquidity and

interest rate risks).

In 1995, RBI had set up a working group under the

chairmanship of Shri S. Padmanabhan to review the banking

supervision system. The Committee certain recommendations and

based on such suggestions a rating system for domestic and foreign


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banks based on the international CAMELS model combining financial

management and systems and control elements was introduced for

the inspection cycle commencing from July 1998. It recommended

that the banks should be rated on a five point scale (A to E) based on

the lines of international CAMELS rating model.

All exam materials are highly confidential, including the

CAMELS. A bank's CAMELS rating are directly known only by the

bank's senior management and the appropriate supervisory staff.

CAMELS ratings are never released by supervisory agencies, even

on a lagged basis. While exam results are confidential, the public

may infer such supervisory information on bank conditions based on

subsequent bank actions or specific disclosures.

Overall, the private supervisory information gathered during a bank

exam is not disclosed to the public by supervisors, although studies

show that it does filter into the financial markets.

CAMELS ratings in the supervisory monitoring of banks

Several academic studies have examined whether and to what

extent private supervisory information is useful in the supervisory

monitoring of banks. With respect to predicting bank failure, Barker

and Holds worth (1993) find evidence that CAMEL ratings are useful,

even after controlling for a wide range of publicly available

information about the condition and performance of banks. Cole and

Gunther (1998) examine a similar question and find that although

CAMEL ratings contain useful information, it decays quickly. For the


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period between 1988 and 1992, they find that a statistical model

using publicly available financial data is a better indicator of bank

failure than CAMEL ratings that are more than two quarters old.

Hirtle and Lopez (1999) examine the usefulness of past CAMEL

ratings in assessing banks' current conditions. They find that,

conditional on current public information, the private supervisory

information contained in past CAMEL ratings provides further insight

into bank current conditions, as summarized by current CAMEL

ratings. The authors find that, over the period from 1989 to 1995, the

private supervisory information gathered during the last on-site exam

remains useful with respect to the current condition of a bank for up

to 6 to 12 quarters (or 1.5 to 3 years). The overall conclusion drawn

from academic studies is that private supervisory information, as

summarized by CAMELS ratings, is clearly useful in the supervisory

monitoring of bank conditions.

CAMELS ratings in the public monitoring of banks

Another approach to examining the value of private supervisory

information is to examine its impact on the market prices of bank

securities. Market prices are generally assumed to incorporate all

available public information. Thus, if private supervisory information

were found to affect market prices, it must also be of value to the

public monitoring of banks.


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Such private information could be especially useful to financial

market participants given the informational asymmetries in the

commercial banking industry. Since banks fund projects not readily

financed in public capital markets, outside monitors should find it

difficult to completely assess banks' financial conditions. In fact,

Morgan (1998) finds that rating agencies disagree more about banks

than about other types of firms. As a result, supervisors with direct

access to private bank information could generate additional

information useful to the financial markets, at least by certifying that a

bank's financial condition is accurately reported.

The direct public beneficiaries of private supervisory

information, such as that contained in CAMELS ratings, would be

depositors and holders of banks' securities. Small depositors are

protected from possible bank default by FDIC insurance, which

probably explains the finding by Gilbert and Vaughn (1998) that the

public announcement of supervisory enforcement actions, such as

prohibitions on paying dividends, did not cause deposit runoffs or

dramatic increases in the rates paid on deposits at the affected

banks.

However, uninsured depositors could be expected to respond

more strongly to such information. Jordan, et al (1999) finds that

uninsured deposits at banks that are subjects of publicly-announced

enforcement actions, such as cease-and-desist orders, decline during

the quarter after the announcement.


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The holders of commercial bank debt, especially subordinated

debt, should have the most in common with supervisors, since both

are more concerned with banks' default probabilities (i.e., downside

risk). As of year-end 1998, bank holding companies (BHCs) had

roughly $120 billion in outstanding subordinated debt. DeYoung, et

al., (1998) examine whether private supervisory information would be

useful in pricing the subordinated debt of large BHCs. The authors

use an econometric technique that estimates the private information

component of the CAMEL ratings for the BHCs' lead banks and

regresses it onto subordinated bond prices. They conclude that this

aspect of CAMEL ratings adds significant explanatory power to the

regression after controlling for publicly available financial information

and that it appears to be incorporated into bond prices about six

months after an exam. Furthermore, they find that supervisors are

more likely to uncover unfavorable private information, which is

consistent with managers' incentives to publicize positive information

while de-emphasizing negative information.

These results indicate that supervisors can generate useful

information about banks, even if those banks already are monitored

by private investors and rating agencies. The market for bank equity,

which is about eight times larger than that for bank subordinated

debt, was valued at more than $910 billion at year-end 1998. Thus,

the academic literature on the extent to which private supervisory

information affects stock prices is more extensive. For example,

Jordan, et al., (1999) find that the stock market views the

announcement of formal enforcement actions as informative. That is,


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such announcements are associated with large negative stock

returns for the affected banks. This result holds especially for banks

that had not previously manifested serious problems.

Focusing specifically on CAMEL ratings, Berger and Davies

(1998) use event study methodology to examine the behavior of BHC

stock prices in the eight-week period following an exam of its lead

bank. They conclude that CAMEL downgrades reveal unfavorable

private information about bank conditions to the stock market. This

information may reach the public in several ways, such as through

bank financial statements made after a downgrade. These results

suggest that bank management may reveal favorable private

information in advance, while supervisors in effect force there lease

of unfavorable information.

Berger, Davies, and Flannery (1998) extend this analysis by

examining whether the information about BHC conditions gathered by

supervisors is different from that used by the financial markets. They

find that assessments by supervisors and rating agencies are

complementary but different from those by the stock market. The

authors attribute this difference to the fact that supervisors and rating

agencies, as representatives of debt holders are more interested in

default probabilities than the stock market, which focuses on future

revenues and profitability. This rationale also could explain the

authors' finding that supervisory assessments are much less accurate

than market assessments of banks' future performances.


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In summary, on-site bank exams seem to generate additional

useful information beyond what is publicly available. However,

according to Flannery (1998), the limited available evidence does not

support the view that supervisory assessments of bank conditions are

uniformly better and timelier than market assessments.

1. Capital Adequacy

Capital base of financial institutions facilitates depositors in

forming their risk perception about the institutions. Also, it is the key

parameter for financial managers to maintain adequate levels ofcapitalization. Moreover, besides absorbing unanticipated shocks, it

signals that the institution will continue to honor its obligations. The

most widely used indicator of capital adequacy is capital to risk-

weighted assets ratio (CRWA). According to Bank Supervision

Regulation Committee (The Basle Committee) of Bank for

International Settlements, a minimum 8 percent CRWA is required.

Capital adequacy ultimately determines how well financial

institutions can cope with shocks to their balance sheets. Thus, it is

useful to track capital-adequacy ratios that take into account the most

important financial risks foreign exchange, credit, and interest rate

risksby assigning risk weightings to the institutions assets.

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

is expressed as a percentage of a bank's risk weighted credit

exposures. It is also known as ""Capital to Risk Weighted Assets

Ratio (CRAR).


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Capital adequacy is measured by the ratio of capital to risk-

weighted assets (CRAR). A sound capital base strengthens

confidence of depositors.

This ratio is used to protect depositors and promote the stability

and efficiency of financial systems around the world.

2. Asset Quality:

Asset quality determines the robustness of financial institutionsagainst loss of value in the assets. The deteriorating value of assets,

being prime source of banking problems, directly pour into other

areas, as losses are eventually written-off against capital, which

ultimately jeopardizes the earning capacity of the institution. With this

backdrop, the asset quality is gauged in relation to the level and

severity of non-performing assets, adequacy of provisions,

recoveries, distribution of assets etc. Popular indicators include

nonperforming loans to advances, loan default to total advances, and

recoveries to loan default ratios.

The solvency of financial institutions typically is at risk when their

assets become impaired, so it is important to monitor indicators of the

quality of their assets in terms of overexposure to specific risks,

trends in nonperforming loans, and the health and profitability of bank

borrowers especially the corporate sector. Share of bank assets in

the aggregate financial sector assets: In most emerging markets,

banking sector assets comprise well over 80 per cent of total financial


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sector assets, whereas these figures are much lower in the

developed economies. Furthermore, deposits as a share of total bank

liabilities have declined since 1990 in many developed countries,

while in developing countries public deposits continue to be dominant

in banks. In India, the share of banking assets in total financial sector

assets is around 75 per cent, as of end-March 2008. There is, no

doubt, merit in recognizing the importance of diversification in the

institutional and instrument-specific aspects of financial

intermediation in the interests of wider choice, competition and

stability. However, the dominant role of banks in financial

intermediation in emerging economies and particularly in India will

continue in the medium-term; and the banks will continue to be

special for a long time. In this regard, it is useful to emphasize the

dominance of banks in the developing countries in promoting non-

bank financial intermediaries and services including in development

of debt-markets.

Even where role of banks is apparently diminishing in emerging

markets, substantively, they continue to play a leading role in non-

banking financing activities, including the development of financial

markets.

One of the indicators for asset quality is the ratio of non-performing

loans to total loans (GNPA). The gross non-performing loans to gross

advances ratio is more 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-Performing Assets

Advances are classified into performing and non-performing

advances (NPAs) as per RBI guidelines. NPAs are further classified

into sub-standard, doubtful and loss assets based on the criteria

stipulated by RBI. An asset, including a leased asset, becomes

nonperforming when it ceases to generate income for the Bank.

An NPA is a loan or an advance where:

1) Interest and/or installment of principal remains overdue

for a period of more than 90 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 of bills purchased and discounted;

4) A loan granted for short duration crops will be treated as

an NPA if the installments of principal or interest thereon

remain overdue for two crop seasons; and

5) A loan granted for long duration crops will be treated as

an NPA if the installments of principal or interest thereon

remain overdue for one crop season. The Bank classifies

an account as an NPA only if the interest imposed during

any quarter is not fully repaid within 90 days from the end

of the relevant quarter. This is a key to the stability of the

banking sector. There should be no hesitation in stating

that Indian banks have done a remarkable job in

containment of non-performing loans (NPL) considering


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the overhang issues and overall difficult environment. For

2008, the net NPL ratio for the Indian scheduled

commercial banks at 2.9 per cent is ample testimony to

the impressive efforts being made by our banking system.

In fact, recovery management is also linked to the banks

interest margins. The cost and recovery management

supported by enabling legal framework hold the key to

future health and Competitiveness of the Indian banks.

No doubt, improving recovery-management in India is an

area requiring expeditious and effective actions in legal,

institutional and judicial processes.

3. Management Soundness

Management of financial institution is generally evaluated in

terms of capital adequacy, asset quality, earnings and profitability,

liquidity and risk sensitivity ratings. In addition, performance

evaluation includes compliance with set norms, ability to plan and

react to changing circumstances, technical competence, leadership

and administrative ability. In effect, management rating is just an

amalgam of performance in the above-mentioned areas.

Sound management is one of the most important factors behind

financial institutions performance. Indicators of quality of

management, however, are primarily applicable to individual

institutions, and cannot be easily aggregated across the sector.


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Furthermore, given the qualitative nature of management, it is difficult

to judge its soundness just by looking at financial accounts of the

banks.

Nevertheless, total expenditure to total income and operating

expense to total expense helps in gauging the management quality of

the banking institutions. Sound management is the key to bank

performance but is difficult to measure. It is primarily a qualitative

factor applicable to individual institutions. Several indicators,

however, can jointly serveas, for instance, efficiency measures

doas an indicator of management soundness.

The ratio of non-interest expenditures to total assets (MGNT)

can be one of the measures to assess the working of the

management. . This variable, which includes a variety of expenses,

such as payroll, workers compensation and training investment,

reflects the management policy stance.

Efficiency Ratios demonstrate how efficiently the company

uses its assets and how efficiently the company manages its

operations.

Asset Turnover Ratio= Revenue

Total Assets

It indicates the relationship between assets and revenue.


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Things to remember

Companies with low profit margins tend to have high asset

turnover, those with high profit margins have low asset turnover

- it indicates pricing strategy.

This ratio is more useful for growth companies to check if in

fact they are growing revenue in proportion to sales.

Asset Turnover Analysis:

This ratio is useful to determine the amount of sales that are

generated from each dollar of assets. As noted above, companies

with low profit margins tend to have high asset turnover, those with

high profit margins have low asset turnover.

.

4. Earnings & Profitability

Earnings and profitability, the prime source of increase in

capital base, is examined with regards to interest rate policies and

adequacy of provisioning. In addition, it also helps to support present

and future operations of the institutions. The single best indicator

used to gauge earning is the Return on Assets (ROA), which is net

income after taxes to total asset ratio.

Strong earnings and profitability profile of banks reflects the

ability to support present and future operations. More specifically, this

determines the capacity to absorb losses, finance its expansion, pay

dividends to its shareholders, and build up an adequate level of

capital. Being front line of defense against erosion of capital base


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from losses, the need for high earnings and profitability can hardly be

overemphasized. Although different indicators are used to serve the

purpose, the best and most widely used indicator is Return on Assets

(ROA). However, for in-depth analysis, another indicator Net Interest

Margins (NIM) is also used. Chronically unprofitable financial

institutions risk insolvency. Compared with most other indicators,

trends in profitability can be more difficult to interpretfor instance,

unusually high profitability can reflect excessive risk taking.

ROA-Return on Assets

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

assets. ROA gives an idea as to how efficient management is at

using its assets to generate earnings. Calculated by dividing a

company's annual earnings by its total assets, ROA is displayed as a

percentage. Sometimes this is referred to as "return on investment".

The formula for return on assets is:

ROA tells what earnings were generated from invested capital

(assets). ROA for public companies can vary substantially and will be

highly dependent on the industry. This is why when using ROA as acomparative measure, it is best to compare it against a company's

previous ROA numbers or the ROA of a similar company.


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The assets of the company are comprised of both debt and equity.

Both of these types of financing are used to fund the operations of the

company. The ROA figure gives investors an idea of how effectively

the company is converting the money it has to invest into net income.

The higher the ROA number, the better, because the company is

earning more money on less investment. For example, if one

company has a net income of $1 million and total assets of $5 million,

its ROA is 20%; however, if another company earns the same

amount but has total assets of $10 million, it has an ROA of 10%.

Based on this example, the first company is better at converting its

investment into profit. When you really think about it, management's

most important job is to make wise choices in allocating its resources.

Anybody can make a profit by throwing a ton of money at a problem,

but very few managers excel at making large profits with little

investment

5. Liquidity

An adequate liquidity position refers to a situation, where

institution can obtain sufficient funds, either by increasing liabilities or

by converting its assets quickly at a reasonable cost. It is, therefore,

generally assessed in terms of overall assets and liability

management, as mismatching gives rise to liquidity risk. Efficient fund

management refers to a situation where a spread between rate

sensitive assets (RSA) and rate sensitive liabilities (RSL) is

maintained. The most commonly used tool to evaluate interest rate

exposure is the Gap between RSA and RSL, while liquidity is gauged

by liquid to total asset ratio.


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Initially solvent financial institutions may be driven toward

closure by poor management of short-term liquidity. Indicators should

cover funding sources and capture large maturity mismatches.

The term liquidity is used in various ways, all relating to

availability of, access to, or convertibility into cash.

An institution is said to have liquidity if it can easily meet its

needs for cash either because it has cash on hand or can

otherwise raise or borrow cash.

A market is said to be liquid if the instruments it trades can

easily be bought or sold in quantity with little impact on market

prices.

An asset is said to be liquid if the market for that asset is liquid.

The common theme in all three contexts is cash. A corporation

is liquid if it has ready access to cash. A market is liquid if participants

can easily convert positions into cashor conversely. An asset is

liquid if it can easily be converted to cash.


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The liquidity of an institution depends on:

The institution's short-term need for cash;

Cash on hand;

Available lines of credit;

The liquidity of the institution's assets;

The institution's reputation in the marketplacehow willing will

counterparty is to transact trades with or lend to the institution?

The liquidity of a market is often measured as the size of its bid-

ask spread, but this is an imperfect metric at best. More generally,

Kyle (1985) identifies three components of market liquidity:

Tightness is the bid-ask spread;

Depth is the volume of transactions necessary to move prices;

Resiliency is the speed with which prices return to equilibrium

following a large trade.

Examples of assets that tend to be liquid include foreign

exchange; stocks traded in the Stock Exchange or recently issued

Treasury bonds. Assets that are often illiquid include limited

partnerships, thinly traded bonds or real estate. Cash maintained by

the banks and balances with central bank, to total asset ratio (LQD) is

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

of liquid assets are perceived safe, since these assets would allow

banks to meet unexpected withdrawals.


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Credit deposit ratio is a tool used to study the liquidity position

of the bank. It is calculated by dividing the cash held in different forms

by total deposit. A high ratio shows that there are more amounts of

liquid cash with the bank to meet its clients cash withdrawals.

6. Sensitivity to Market Risk

It refers to the risk that changes in market conditions could

adversely impact earnings and/or capital. Market Risk encompasses

exposures associated with changes in interest rates, foreignexchange rates, commodity prices, equity prices, etc. While all of

these items 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 bank operations makes them vulnerable to various kinds of

financial risks. Sensitivity analysis reflects institutions exposure to

interest rate risk, foreign exchange volatility and equity price risks

(these risks are summed in market risk). Risk sensitivity is mostly

evaluated in terms of managements ability to monitor and control

market risk.

Banks are increasingly involved in diversified operations, all of

which are subject to market risk, particularly in the setting of interest

rates and the carrying out of foreign exchange transactions. In

countries that allow banks to make trades in stock markets or

commodity exchanges, there is also a need to monitor indicators of

equity and commodity price risk.


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Interest Rate Risk Basics

In the most simplistic terms, interest rate risk is a balancing act.

Banks are trying to balance the quantity of reprising assets with the

quantity of repricing liabilities. For example, when a bank has more

liabilities repricing in a rising rate environment than assets repricing,

the net interest margin (NIM) shrinks. Conversely, if your bank is

asset sensitive in a rising interest rate environment, your NIM will

improve because you have more assets repricing at higher rates.

An extreme example of a repricing imbalance would be funding

30-year fixed-rate mortgages with 6-month CDs. You can see that in

a rising rate environment the impact on the NIM could be devastating

as the liabilities reprice at higher rates but the assets do not. Because

of this exposure, banks are required to monitor and control IRR and

to maintain a reasonably well-balanced position.

Liquidity risk is financial risk due to uncertain liquidity. An

institution might lose liquidity if its credit rating falls, it experiences

sudden unexpected cash outflows, or some other event causes

counterparties to avoid trading with or lending to the institution. A firm

is also exposed to liquidity risk if markets on which it depends are

subject to loss of liquidity.

Liquidity risk tends to compound other risks. If a trading

organization has a position in an illiquid asset, its limited ability to

liquidate that position at short notice will compound its market risk.


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Suppose a firm has offsetting cash flows with two different

counterparties on a given day. If the counterparty that owes it a

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

to make its payment. Should it be unable to do so, it too we default.

Here, liquidity risk is compounding credit risk.

Accordingly, liquidity risk has to be managed in addition to

market, credit and other risks. Because of its tendency to compound

other risks, it is difficult or impossible to isolate liquidity risk. In all but

the most simple of circumstances, comprehensive metrics of liquidity

risk don't exist. Certain techniques of asset-liability management can

be applied to assessing liquidity risk. If an organization's cash flows

are largely contingent, liquidity risk may be assessed using some

form of scenario analysis. Construct multiple scenarios for market

movements and defaults over a given period of time. Assess day-

today cash flows under each scenario. Because balance sheets

differed so significantly from one organization to the next, there is

little standardization in how such analyses are implemented.

Regulators are primarily concerned about systemic implications

of liquidity risk.

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

distinguish between different categories of risk: market risk, credit

risk, liquidity risk, etc. Although such categorization is convenient, it is

only informal. Usage and definitions vary. Boundaries between

categories are blurred. A loss due to widening credit spreads may


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reasonably be called a market loss or a credit loss, so market risk

and credit risk overlap. Liquidity risk compounds other risks, such as

market risk and credit risk. It cannot be divorced from the risks it

compounds.

An important but somewhat ambiguous distinguish is that

between market risk and business risk. Market risk is exposure to the

uncertain market value of a portfolio. Business risk is exposure to

uncertainty in economic value that cannot be marked-to market.

The distinction between market risk and business risk parallels the

distinction between market-value accounting and book-value

accounting.

The distinction between market risk and business risk is

ambiguous because there is a vast "gray zone" between the two.

There are many instruments for which markets exist, but the markets

are illiquid. Mark-to-market values are not usually available, but mark-

to model values provide a more-or-less accurate reflection of fair

value. Do these instruments pose business risk or market risk? The

decision is important because firms employ fundamentally different

techniques for managing the two risks.

Business risk is managed with a long-term focus. Techniques

include the careful development of business plans and appropriate

management oversight. Book-value accounting is generally used, so

the issue of day-to-day performance is not material. The focus is on

achieving a good return on investment over an extended horizon.


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Market risk is managed with a short-term focus. Long-term losses are

avoided by avoiding losses from one day to the next. On a tactical

level, traders and portfolio managers employ a variety of risk metrics

duration and convexity, the Greeks, beta, etc.to assess their

exposures. These allow them to identify and reduce any exposures

they might consider excessive. On a more strategic level,

organizations manage market risk by applying risk limits to traders' or

portfolio managers' activities. Increasingly,

Value - at -risk is being used to define and monitor these limits. Some

organizations also apply stress testing to their portfolios.


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RESERCH METHODOLOGY

DESIGN OF THE STUDY

STATEMENT OF THE PROBLEM

In the recent years the financial system especially the banks have

undergone numerous changes in the form of reforms, regulations &

norms. CAMELS framework for the performance evaluation of banks

is an addition to this. The study is conducted to analyze the pros &

cons of this model.

OBJECTIVES OF STUDY

To do an in-depth analysis of the model.

To analyze bank to get the desired results by using CAMELS

as a tool of measuring performance.

RESEARCH PROPOSAL

The Bank after the implementation of the balanced scorecard in 2002

has under gone a drastic change. Both its peoples and process

perspectives have changed visibly and the employees have full faith

in the new strategy to produce quick results and keep them ahead in

the industry. The balanced scorecard approach has brought about

more role clarity in the job profile and has improved processes. In

short it focuses not only on short term goals but is very clear about its

way to achieve the long term goal.


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METHODOLOGY

i) AREA OF SURVEY:

The survey was done for Saurastra Gramin Bank. The study

environment was the Banking industry.

ii) DATA SOURCE:

Primary Data: Primary data was collected from the company

balance sheets and company profit and loss statements.

Secondary Data: Secondary data on the subject was collected

from reference books, company prospectus, company annual

reports and websites.

iii) PLAN OF ANALYSIS:

The data analysis of the information got from the balance sheets was

done and ratios were used. Graph and charts were used to illustrate

trends..


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LIMITATIONS OF THE STUDY

1) The study was limited to three banks.

2) Time and resource constrains.

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

used for performance evaluation of other financial institutions.

4) The study was completely done on the basis of ratios calculated

from the balance sheets.

5) It has not been possible to get a personal interview with the top

management employees of all banks under study.

DATA ANALYSIS & INTERPRETATION


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Now each parameter will be taken separately & discussed in

detail.

C=CAPITAL ADEQUACY:

Capital adequacy ratio is defined as where Risk can either be

weighted assets or the respective national regulator's minimum total

capital requirement. If using risk weighted assets,

9%

The percent threshold (8% in this case, a common requirement for

regulators conforming to the Basel Accords) is set by the national

banking regulator.

Two types of capital are measured: tier one capital, which can absorb

losses without a bank being required to cease trading, and tier two

capital, which can absorb losses in the event of a winding-up and so

provides a lesser degree of protection to depositors. Capital

adequacy is stipulated by bank for international settlements (BIS) at

Basle to ensure that the banks have enough capital to absorb losses

from assets which turn bad. The norms are fixed as a percentage of

risk weighted assets i.e. assets are, weighted on the basic of the risk

involved in their realization. For example, cash is given risk involved

in their realization. For example, cash is given risk weight age of 0%

and higher weight age for assets secured by goods, mortgage etc. in

India narasimham committee recommendation have stipulated that

Indian bank particularly those with international presence must have

a capital adequacy reflects the overall financial condition of the banks


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and also the ability of the management to meet the need for

additional capital. It includes the following.

Capital adequacy Ratio

Debt-Equity Ratio

Advances to assets

G-securities to total investment

1. Capital adequacy ratio (CAR) or capital to risk assets ratio

(CRAR)


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Per the latest RBI norms, banks in India should have a CAR of 9%. It

is arrived at by dividing the Tier 1 and Tier 2 capital by risk weighted

assets. Tier1 capital comprises sub-ordinate debt of 5-7 year tenure

CRAR=capital fund/risk weighted assets100

Calculation of capital adequacy ratio of Saurastra Gramin Bank

Particulars As on

2005-06

As on

2006-07

As on

2007-08

As on

2008-09

Capital

adequacy ratio

13.96% 11.91% 10.71% 9.45%


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Interpretation of the Capital Adequacy Ratio

The minimum CAR as per RBI norms is 9% at present. In fact,

Gramin bank has always shown a healthy and improved margin of

over 9% which is stipulated by RBI, the year 2005-2006,it seem to

decline in CAR gradually to10.71 % up to9.45 %in 2007and 2008.

This is due to study rise in the weighted Assets the main reason for

the rise. Weighted Assets and decline in CAR is constant increase inadvance over the last few years.

0

2

4

6

8

10

12

14

16

2005-06 2006-07 2007-08 2008-09

Series 1


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2. Advances to assets


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Total advances also include receivables. The value

total assets are excluding revaluation of all the assets.

Total Advance to Total assets=Total Advance/Total Assets

CALCULATION OF ADVANCE TO ASSETS OF GRAMIN BANK

Particulars As on 2005-

06

As on 2006-

07

As on 2007-

08

As on 2008-

09

Total

advances

3644938000 4420800000 5369238000 6505849000

Total

assets

7356745000 8912268000 9889329000 12768747000

ratio 49.55% 49.60% 54.29% 50.95%


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Interpretation of the Advances to assets ratio

This ratio shows the total advances as a percentage of total assets,

which can give the capital adequacy of the firm. It shows the ability of

firm to meet capital need. Here, we see that Garmin bank has

maintaining constant percentage of advance to assets for last 4 year

47

48

49

50

51

52

53

54

55

2005-06 2006-07 2007-08 2008-09

Series 1


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3. G-SECURITIES TO TOTAL INVESTMENT

The ratio is calculated by dividing the amount invested in government

securities by total investments.

G-Securities to total investments= G-Securities/total investments100


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Calculation of G-Securities to Total Investment of Saurastra

Gramin Bank

As on 2006-

07

As on 2007-

08

Particulars As on 2005-

06

As on 2008-

09

1715492000 2261399000 G security 1486016000 2903544000

2011962000 2623990000 Total

investment

1661436000 3378844000

85.26% 86.18% ratio 89.44% 85.93%


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Interpretation of the G-securities to total investment

G-securities to total investment indicate the percentage of risk free

investment in bank ` investment portfolio. Science government

security are risk free, the higher the

G-securities to total investment ratio the lower the risk lower the risk

involved in bank investment. The calculation indicates that Garmin

bank has shown a stable rise in G-securities investment and

therefore it has less risk involved in banks investment.

83

84

85

86

87

88

89

90

2005-06 2006-07 2007-08 2008-09

Series 1


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A = ASSETS QUALITY

The prime motto behind measuring the assets quality is to ascertain

the quality the quality of assets and majority of ratio in this segment

are related to non-performing assets i.e. NAP.A credit facility is

treated as past due when it remains outstanding for 30 days beyond

the due date. An NPA is defining generally as a credit facility in

respect of which interest or installment of principal is in arrears fortwo quarter or more. This segment contain following ratio ..

Gross

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