GURU ARJAN DEV INSTITUTE OF DEVELOPMENT …...Guru GURU ARJAN DEV INSTITUTE OF DEVELOPMENT STUDIES 2012 DISCLOSURE PRACTICES IN BANKING SECTOR OF INDIA A Comparative Study Dr Gursharan

Guru

GURU ARJAN DEV INSTITUTE OF DEVELOPMENT STUDIES

2012

DISCLOSURE PRACTICES IN BANKING SECTOR OF INDIA

A Comparative Study

Dr Gursharan Singh Kainth and Jyoti Agnihotri

1 4 - P R E E T A V E N U E , M A J I T H A R O A D , N A U S H E R A , A M R I T S A R - 1 4 3 0 0 8

DISCLOSURE PRACTICES IN BANKING SECTOR

2

CHAPTER 1

EVOLUTION OF DISCLOSURE PRACTICES IN BANKING SECTOR

The growth in the size of business enterprise, divorce of ownership and management,

increasing public interest in the affairs of the companies and greater emphasis on rational

decision making have greatly enhanced the need for and significance of quantitative

financial information to the external users (Singh, 1973). The financial and quantitative

information generated need to be communicated to the stakeholders in an effective

manner and through appropriate medium, ensuring transparency and timeliness. The

financial statements act as an important medium of communicating such information to

the stakeholders. Preparation of these financial statements is facilitated by a well laid out

system of accounting.

Accounting is often called the language of business. Language helps in forming an

opinion about reality and in communication of information. The American Accounting

Association defines accounting as the process of identifying, measuring and

communicating economic information to permit informed judgments and decisions by

users of the information. The Accounting Principle Board (1970) regarded accounting as

a service activity and its function is to provide quantitative information, primarily

financial in nature, about economic entities, that is intended to be useful in making

economic decisions. Thus, the end objective of accounting is to produce and report the

quantifiable financial data to the interested groups to be used by them in their respective

decisions (Chander, 2005). These interested groups can be internal users, viz.,

management or external users, viz., shareholders, debenture holders, financial institutions,

security analysts, government, creditors, suppliers and general public. These users want

accounting information communicated to them should be useful so that it helps in rational

decision making. Thus the essence of accounting is in communication which is termed as

disclosure or reporting.

The complexity of business operations and decisional needs of the users have led to the

necessity of having a disclosure system which ensures the dissemination of financial,

quantitative and qualitative information, not only in the respect of what has happened but


3

also relating to future plans, prospects and actions. This calls for a disclosure mechanism

as well as strategy to have favorable impact on value to all stakeholders (Kant, 2002).

1.1 CORPORATE DISCLOSURE: THE CONCEPT

1.1.1 Disclosure Defined

Disclosure is the process through which an entity communicates with the outside world

(Chandra, 1974). Disclosure refers to the publication of any economic information

relating to a business enterprise, quantitative or otherwise, which facilitates the making of

investment decisions (Choi, 1973). The American Accounting Association defines it as

“the movement of information from private (i.e., inside information) into the public

domain.” It emerges from these definitions that disclosure means reporting of

quantitative and qualitative information of financial and non-financial nature regarding

the reporting, entity to outsiders for the purpose of their decision making. Information

about the affairs of the company can be communicated through different media viz.

prospectus, financial press releases, annual report, interim reports and personal contacts

with company officials. In addition, newspapers, business and industry magazines,

investment advisory services and government statistics also provide information about a

company. Despite the existence of different sources of information, the annual report is

regarded as the most important of information about a company’s affairs. Corporate

annual reports represent the most easily accessible and extremely important source of

basic information concerning an enterprise.

The central focus of corporate financial reporting has changed with the passage of time.

In the past, corporate financial reporting was oriented to providing stewardship

information, which was essentially backward looking. The essence of stewardship

reporting lies in giving an account of what management has done with the money

entrusted to it. Today, the preparation and presentation of corporate financial reports is

being driven by the consideration of providing information that is useful for making

economic decisions, i.e., decision oriented financial reporting. Decision oriented

financial reporting is basically concerned with providing information that will enable the

users of the financial statements to judge the ability of the company to generate cash

flows in the future. This shift in emphasis is fully reflected in the objectives of financial


4

statements developed by Financial Accounting Standards Board (FASB). According to

the True Blood Study Group Report, “the basic objective of financial statements is to

provide information useful for making economic decisions” (Sorter & Gams, 1974).

1.1.2 Significance of Disclosure The need for full disclosure is irrefutable in a free enterprise economy (Chandra, 1975).

Proper disclosure increases investor confidence and makes financing through the

securities market easier (Maloo, 1986).

Sorter and Gams (1974) affirm the significance of corporate disclosures when they say

that, “Society looks to corporations for assistance in the efficient allocation of resources

and expects the corporations to assume the responsibility of providing information that

furthers this goal” . The quality of corporate disclosures influences to a great extent the

quality of investment decisions made by investors (Singhvi & Desai, 1971).

P.B. Miller (2002) asserts that quality driven financial reporting will produce a more

efficient capital market, a more productive economy and a more prosperous society.

Nothing can defeat the unarguable truth that more complete reporting can produce large

economic rewards. Companies that provide better information on their products to their

customers are likely to command a better price in the market (Venkatesh, 1997). Studies

further give evidence to the positive relationship between higher disclosure levels and

lower cost of capital – be it cost of equity capital (Bostosan, 1997) or cost of debt

(Sengupta, 1998).

Investors would prefer to invest in a company that discloses fully than in a company that

doesn’t. Not only investors benefit from full disclosure, as they do not have to bear the

uncertainty caused by the lack of corporate disclosure, but the corporation also gain

because an upward move in stock price reduces its cost of capital. Additionally it

improves allocation of capital and productivity in the economy. Another argument in

favour of full disclosure is that it stabilizes the fluctuations in stock prices. Further lack of

adequate disclosure can create ignorance in the securities market and can result in

misallocation of resources in the economy.


5

Disclosure of information has a greater significance in achieving accounting objectives

and for this disclosure needs to be adequate. Adequate disclosure means fair and full

disclosure so that it helps the users in making rational decisions. It reflects economic

efficiency of the resource use and thereby helps in directing the flow of capital into

productive channels. It would also prevent and mitigate fraud and manipulation. The

more the information available, the less is the opportunity for fraud and greater the

confidence in the company. Thus adequate disclosure relates particularly to

objectives of relevance, neutrality, completeness and understandability. Information

should be presented in a way that facilitates understanding and avoids erroneous

implications.

There is no accurate measurement of the adequacy of disclosure, it can be judged in

the light of the need and requirements of the users and the purpose for which disclosure is

made. In determining the true nature of adequate disclosure, Buzby (1974) feels that five

questions must be answered:

(1) for whom is the information to be disclosed?

(2) What is the purpose of the information?

(3) How much information should be disclosed?

(4) How should the information be disclosed?

(5) When should the information be disclosed?

The achievement of adequate disclosure is a challenge which the accounting profession

must meet if it is to maintain and hopefully improve its contribution to our society

(Buzby, 1974).

1.1.3 Objectives of Disclosure As pointed out by Stephen L. Buzby (1974), “any comprehensive discussion of the nature

of adequate disclosure depends in part on the objectives of financial accounting”. A set

of carefully defined objectives is basic to the development of any theory, including

disclosure theory (Maloo, 1986). Numerous accounting professionals, committees and

bodies around the world including APB [1970], The True Blood Report [1973], The

Corporate Report [London, 1975], FASB [1978], The Stamp Report [1980] and Jenkins

Committee [1994] have attempted to define the objectives of corporate reporting.


6

The Accounting Principles Board has identified Relevance, Understandability,

Verifiability, Neutrality, Timeliness, Comparability and Completeness as qualitative

objectives of financial reporting. A study group was appointed in 1971 by the American

Institute of Certified Public Accountants (AICPA) under the chairmanship of Robert M.

True Blood, for the development of objectives of financial statements. The True Blood

Committee recommended twelve objectives. The main objective was stated as, “The

basic objective of financial statements is to provide information useful for making

economic decisions.” The True Blood Report also presented seven qualitative

characteristics which the financial statement information should possess in order to

satisfy user needs:

1. Relevance and Materiality

2. Substance rather than Form

3. Reliability

4. Freedom from Bias

5. Comparability

6. Consistency

7. Understandability

The most comprehensive statement on objectives of financial reporting is the SFAC

(Statement of Financial Accounting concepts) No. 1 [1978] “Objectives of Financial

Reporting by Business Enterprises” issued by FASB. The brief overview of the objectives

of financial reporting developed in this statement are as follows:

Objectives of Financial Reporting

(Specific)

Provide information about economic resources, claims to resources and changes in resources and claims.

Provide information useful in assessing amount,

timing and uncertainty of future cash flows

Provide information useful in making investment and credit decisions (General)

Source: Robert Meigs et.al (1999); Accounting: The Basis for Business Decisions, Mc Graw Hill


7

The International Accounting Standards Committee (IASC) in 1989, has stated the

objectives of financial statements in the following words:

“The objective of financial statements is to provide information about the financial

position, performance and changes in financial position of an enterprise that is useful to a

wide range of users in making economic decisions.”

The Accounting Standards Board of UK states that the objective of financial statements

is to provide information about the financial position, performance and financial

adaptability of an enterprise that is useful to a wide range of users in making economic

decisions.

It is evident from the above discussion that the primary objective of financial reporting is

providing useful information to user’s for decision making. In the words of Beaver (1978)

the comprehensive and fundamental objective of corporate reporting is, “to assure the

public availability in an efficient and reasonable manner on a timely basis of reliable, firm

oriented information material to informed investment and corporate suffrage decision

making” .

Having discussed the concept of corporate disclosures; the next section discusses the

importance of disclosure in baking industry.

1.2 INDIAN BANKING

Banking is the fulcrum of an Economy. The banking industry is one of the basic

instruments of Economic Growth. According to C.H. Bhabha (1956), “Banking is the

kingpin of the chariot of economic progress.”

Indian Banking has come a long way since independence and has really transformed itself

from a fully regulated institution to a live, vibrant organization responding to

environmental dynamics (Chaddha, 2006).


8

In 1786 General Bank of India was established and it was the first development in the

structural banking system in India. Later Bank of Hindustan and Bengal Bank came into

existence. The East India Company established three banks, the Bank of Bengal [1809],

the Bank of Bombay [1840] and the Bank of Madras [1843]. These banks were

amalgamated in 1920 to form Imperial Bank of India. The Imperial Bank was

nationalized and was renamed as State Bank of India (SBI) in the year 1955 to improve

social control with a view to remedy the basic weakness of Indian Banking system and to

ensure that banks would cater to the needs of the hither to neglect and weaker sections of

community instead of big business and those connected with them. The Reserve Bank of

India (RBI) came into existence in 1935. The RBI has a centralized control over all these

banks and performs a wide range of functions such as issue of bank notes, supervise and

administer exchange control, banking regulations, grant licenses to new banks and to new

bank branches etc.

It was further felt that the banks which play a vital role in economic growth catered to

mostly the credit requirements of large corporate. Credit requirements of small scale

industries, agriculture and export sectors were not given priority. Thus an important

development took place in 1969 when 14 major commercial banks were nationalized

with the main objective of rendering the largest good to the largest number of people.

Further 6 more banks were nationalized in 1980.

At present Indian banking system can be classified as follows:

PUBLIC SECTOR BANKS

Reserve Bank of India also called as Central Bank

State Bank of India and its 7 associated Banks

Nationalized Banks (19)

Regional Rural Banks sponsored by Public Sector Banks

PRIVATE SECTOR BANKS

Old Generation private Banks

New Generation private Banks

Foreign Banks


9

Scheduled Co-operative Banks

Non Scheduled Banks

Development Banks

Till 1990’s, the Indian banking sector was mostly used by the government as one of its

department to finance its fiscal deficits at low costs, channelize money to the weaker

sections of the society and control the money supply in the economy. The Reserve Bank

of India controlled all banks with iron fist and the banks had very little discretion in fixing

the interest rates for advances and deposits, recruitment policies, decision on branch

expansion, etc. The 1990’s changed everything with LPG (Liberalization, Privatization

and Globalization) becoming the buzz word and really changed the way country

functions. Thus the reform process in the Indian Banking sector was also ignited. The

reforms in the Banking Sector were initiated by the Narasimham Committee, which

submitted its report in two phases one in 1992 and the other in 1998. Deregulation, entry

to private banks, easing of Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio

(CRR), providing more freedom to banks for fixing interest rates on advances / deposits,

recruitment policies, branch network, etc., were initiated on the recommendations of the

committee.

Now the Indian Banking has all together a new address and a metamorphosed road map.

Competition, convergence and consolidation have become the key drivers of Indian

Banking. The banking system is in the process of innovation and the innovation has been

the order of the day. The most exotic in innovative behavior will be the ultimate winner,

for which banks have forayed into the arena where they think innovation, dream

innovation and eat innovation (Mohanty, 2006). Banking in the new millennium would be

a unique experience with emphasis shifting from brick and mortar to click and portal

(Chaddha, 2006).

Thus one thing is for sure that the reform process is on and the Indian banks are in the

right direction. They have adopted best structures, processes and technologies available

worldwide and have moved from strength to strength. Still future poses various

challenges for the banking industry like cost management, recovery management,

technological intensity, risk management and corporate governance. New avenues are


10

being looked into by the various banks such as exposure to capital market, selling

insurance policies, expanding retail credit and banking etc. Banks are planning to move in

the direction to implement Basel II by 2007. Mergers and consolidation is one of the

important steps being taken to compete in the global markets by banks. Thus the Indian

banking industry has come from a long way from being passive business institution to a

highly proactive and dynamic entity.

1.2.1 Importance of Disclosure in Banking It is generally agreed that the most important means of communication with stockholders

is the annual report. The extent of disclosure adequacy in the annual reports may be a

major determinant of the quality of investment decision making in particular, and

economic resource allocation in general. Although these arguments are applicable to all

kinds of corporations, they have, thus far, received inadequate attention in the case of

financial institutions. It is generally agreed that the reporting practices of banks have not

yet reached the same level of adequacy as the non-financial corporations (Kahl &

Belkaoui, 1981).

Banks, commercial or developmental are also business entities. They produce and sell

financial services instead of products. That is how they are referred to as financial

institutions or financial intermediaries. They perform the middleman function of pooling

surplus resources of the saving surplus sector and channelize them to saving deficit

sector. The distinct feature about commercial banks, the focus of the present study, is that

they are highly leveraged firms. More than 90 percent of working funds is obtained from

deposit liability. For a bank, unlike other companies, which has as its principal obligation

the fostering of well being of its shareholders who must be well served, there are far more

public than just shareholders who must be well served. If a bank goes into trouble the

entire community is affected. They subsist on confidence and the confidence is best

demonstrated through the financial solidity. At all time they have to show that there is

even not a shadow about their financial standing. This explains why banking legislations

all over the world make special provisions for the preparation and presentation of

financial statements of banks.


11

Thus banks form a crucial link in a country’s financial system and their well being is

imperative for the economy. In addition the fact that the people by and large deposit their

money with banks and the amount of trust they presuppose necessitates the good

disclosure mechanism for banks.

Banks have two related characteristics that inspire a separate analysis of disclosure

practices of banks. First, banks are generally more opaque than non-financial firms (i.e.,

bank activities are less transparent). Second, banks are frequently heavily regulated,

because of the importance of banks in the economy, because of the opacity of bank assets

and activities and because banks are a ready source of fiscal revenue, thus government

imposes an elaborate array of regulations on banks. At the extreme government owns

banks. Thus from the above discussion we can conclude that the study of disclosure

practices of banks have a special significance.

Having discussed the concept of corporate disclosure together with its relevance and

significance in Banking, the next section reviews the existing literature on the subject

matter highlighting the need and scope of the present study; objectives and corresponding

hypothesis formulated; as well as the specific details of research design and methodology

followed in the study.

1.3 REGULATORY FRAMEWORK OF DISCLOSURE

PRACTICES OF BANKS IN INDIA

The banks are enjoying a dominant position in the Indian financial sector and they are not

merely the economic entities, but are engines of economic growth and social

transformation. The failure of a bank not only affects its own stakeholders, but also has a

systematic impact on the stability of banking system as a whole. The rapid changes

brought in by economic reforms and in innovation in financial products combined with

technological advances, have an effect on increased risk on banking sector. Thus financial

reporting of banking companies is important for several reasons. First, the rapid changes

brought out by economic reforms have exposed the Indian financial sectors in general and


12

the banking sector in particular to the challenges of global banking business. Second,

banking companies in India are also moving towards public participation and are coming

up with their Initial public offerings and also raising funds through Global Depository

Receipts and American Depository Receipts from abroad. Last, unlike other companies

most of the funds used by banks to conduct the business belong to creditors, particularly

to depositors (Singh,2007). Thus, financial reporting norms for banks, assume pertinent

importance in the present context.

Banks must provide full, reliable, and high quality disclosures of their operations and

risks in a timely fashion and must use prudent accounting policies. Such transparency in

bank disclosures (a) enables investors to more accurately assess a banks financial strength

and performance; (b) increases the credibility of the information disclosed by the bank;

(c) demonstrates the risk management ability of the bank by disclosing relevant

information about the quality and quantity of risks it faces and (d) reduces market

uncertainty associated with its cash flow stream. Better quality public disclosures reduce

the level of information asymmetry between bank managers and investors and thereby

enhance investor confidence in banks’ stock and in the banking industry

(Chipalkatti,2002).

Environment of Financial Reporting in India

The major objective of regulating the disclosure practices is to check the window dressing

in the financial statements to make them comparable more informative and hence useful,

and safeguarding the interest of the investors and other users (Chander,2005).

The financial reporting and disclosure of banking companies in India are regulated by the

Banking Regulation Act 1949, the Companies Act 1956, the rules of the Securities and

Exchange Board of India, the guidelines of the Reserve Bank of India, the

recommendations of the Institute of Chartered Accountants of India (ICAI) and the

recommendations of the Basel Committee on Banking Supervision.

1.3.1 The Banking Regulation Act, 1949

The provisions relating to banking companies were incorporated in part X-A of the Indian

companies Act 1913. These provisions were first introduced in 1936. They were found to


13

be inadequate and difficult to administer. Moreover while the primary objective of

companies law is to safeguard the interests of the stakeholder, that of banking legislation

should be the protection of the interest of the depositor. Therefore, it was felt that a

separate legislation was necessary for the regulation of banking in India. This need

became more consistent on account of the considerable development that had taken place

in banking, especially the rapid growth of banking resources and of the number of banks

and branches. Thus the enactment of a separate comprehensive measure had become

imperative.

With this object in view, a bill to amend the law relating to Banking Companies Act was

introduced in the Legislative Assembly in November 1944 and was subsequently

circulated for eliciting public opinion through the Provincial Governments. In the ensuing

budget session of the Assembly the Bill was referred to a Select Committee which was

due to meet in October,1945, but it was lapsed before its consideration by the Committee.

A fresh Bill with certain modifications which suggested themselves on consideration of

the opinions and criticisms received on the 1944 Bill was introduced in the Legislative

Assembly in March,1946 and was referred to a Select Committee in April,1946. The

report of the Select Committee was presented to the Assembly on the 17th February, 1947.

As it was the original intention of the Government that the Bill should be taken up for

disposal by the Legislative Assembly in the form in which it emerged from the Select

Committee and that the changes necessitated in the bill as a result of the passing of the

Indian Independence Act, 1947 and other developments should be moved in the House as

separate amendments, a motion for the continuation of that Bill was adopted on the 17th

November,1947. In view however, of a fairly large number of amendments, government

considered that the passage of the measure would be facilitated if the Bill as reported

upon by the Select Committee were withdrawn and a fresh Bill incorporating all the

amendments were introduced and referred to a Select Committee. The Bill was

accordingly with drawn on the 30th Jan 1948 and the Banking Companies Bill was

introduced.

The Banking Companies Bill was passed by the Legislative Assembly on 10th March,

1949 as The Banking Companies Act 1949. Later on the nomenclature of the Act was

changed and now it stands as the Banking Regulation Act, 1949.

Banks in India are set up and governed by different statutes. The State Bank of India is set

up under the SBI Act 1953, the associate banks under the SBI (Subsidiary Banks) Act,


14

1959. The first group of nationalized banks under The Banking companies (Acquisition

and Transfer of undertakings) Act, 1970. The record group of six nationalized banks

under The Banking Companies (Acquisition and Transfer of undertakings) Act, 1986 and

the private sector banks under the Companies Act 1956. These statutes under which they

are set up, however do not govern the formats of balance sheet and profit and loss account

to be prepared and the provisions regarding the separate formats for such final

accounts by banks have been prescribed under the provisions of the Banking

Regulation Act, 1949.

The Banking Regulation Act 1949 provides a frame work for regulation and supervision

of commercial banking activity. Section 29(1) of the Banking Regulation Act 1949 states

that at the expiration of each calendar year every banking company shall prepare a

balance sheet and profit and loss account in the forms set out in the Third schedule Form

A and Form B of the act respectively. Section 30(1) states that the balance sheet and

profit and loss account should be prepared in accordance with Section 29 and audited by a

person duly qualified under law. Section 31(1) also states that the accounts and balance

sheet, together with the auditor’s report, shall be published in the prescribed manner and

three copies thereof shall be furnished as returns to the RBI within three months from the

end of the period. Section 32 requires that three copies of the accounts and balance sheet,

together with the auditor’s report, should be sent to the registrar of Company Affairs.

1.3.2 The Companies Act, 1956

The history of company legislation in India dates back to the year 1882, when for the first

time country had Indian Companies act passed on the lines of the British Companies Act.

This made preparation and audit of the balance sheet compulsory. The Companies Act,

1913 contained more detailed provisions regarding published accounts introducing a new

form of balance sheet. Further, the Companies (Amendment) Act, 1936 brought

significant changes giving a status to profit and loss account equal to that of balance sheet

and making it compulsory to prepare ‘Directors Report’ on accounts. After India became

independent it was in 1950 that Bhabha Committee was appointed which made

recommendations that formed the basis for the Indian Companies Act, 1956. This Act of

1956 has been amended from time to time depending upon the contemporary

developments and need for regulation.


15

The Banking Regulation Act, 1949 is the chief legislative measure governing banking

business in India. However, the provisions of Indian Companies Act, 1956 are also

applicable to banking companies with regard to matters not covered by the Banking

Regulation Act, 1949.

Sections 210, 211, 212, 216, 217, 227 (1A), 227(2), 227(3), 227(4A), 619 and 641 of the

Indian Companies Act contain various provisions relating to the corporate disclosure.

Sections 210, 211, 212 and 216 contain the provisions relating to the preparation of

Balance sheet and profit & loss account which are not applicable on banking companies

because the preparation of balance sheet and profit & loss account is governed by Section

29(1) the Banking Regulation Act, 1949.

Section 217 of Indian Companies Act requires the preparation of report by the Board of

Directors of the company to be attached with the balance sheet. The section also specifies

the particulars to be included in the board’s report. A report by the board of directors

of the banking company is to be prepared as per section 217 of the companies Act,

1956 with respect to:

The state of the banking company’s affair.

The amount, if any, proposed to be transferred to reserves.

The amount, if any, proposed to be paid as divided; and

Material changes and commitment, if any, affecting the financial position of the

company which has occurred between the ends of the financial year of the

company to which the balance sheet relates and the date of the report.

The report of the board must include a ‘Directors’ Responsibility Statement’ indicating

therein having complied with all applicable Accounting Standards, selected and applied

accounting policies consistently, made reasonable and prudent judgments and estimates,

taken proper and sufficient care in maintaining adequate accounting records for

safeguarding the assets, prevention and detection of fraud and the irregularities and

prepared the annual accounts ongoing concern basis.

Sections 227(1A), 227(2), 227(3), 227(4A) of the Companies Act deal with the matters to

be included in the auditor’s report. However, preparation of the auditor’s report is

governed by section 30 of banking regulation Act, 1949. Section 619 of companies Act


16

deals with the annual reports of the government companies. Section 641 deals with the

power of central Government to alter schedules by notification in the official Gazette.

1.3.3 Reserve Bank of India (RBI)

The Reserve Bank of India is the apex financial institution of the country’s financial

system entrusted with the task of control, supervision, promotion, development and

planning. As India’s central bank, the RBI came into existence on 1st April, 1935 under

the Reserve Bank of India Act, 1934.

The RBI influences the management of commercial banks through its various policies,

directions and regulations. The RBI is committed to enhancing and improving the

levels of transparency and disclosure in banks annual accounts. In addition to its

traditional central banking functions, the RBI has certain non-monetary functions

regarding the nature of banks supervision, and the promotion of sound banking in India.

The Reserve Bank Act 1934 and the Banking Regulation Act 1949 invested the RBI with

wide powers of supervision and control over commercial banks relating to licensing and

establishments, branch expansion, liquidity of their assets, management and methods of

working, amalgamation, reconstruction, and liquidation. Consequently, it is authorized to

carry out periodical inspections of the banks to call for returns and necessary information.

Section 35A of the Banking Regulation Act 1949, empowered the Reserve Bank of India

to give directions to the Banking Companies whenever it deems fit and the banking

companies shall be bound to comply with such directions. Thus the RBI provides a

detailed guidance to banks in the matter of disclosures in the ‘Notes to Accounts’ to

the Financial Statements.

The users of the financial statements need information about the financial position and

performance of the bank in making economic decisions. They are interested in its

liquidity and solvency and the risks related to the assets and liabilities recognized on its

balance sheet items. In the interest of full and complete disclosure, some very useful

information is better provided, or can only be provided, by notes to financial statements.

The use of notes and supplementary information provides the means to explain and

document certain items, which are either presented in the financial statements or

otherwise affect the financial position and performance of the reporting enterprise.

Recently, a lot of attention has been paid to the issue of market discipline in the banking


17

sector. Market discipline, however, works only if market participants have access to

timely and reliable information, which enables them to assess banks activities and risks

inherent in these activities. In order to encourage market discipline, the Reserve Bank of

India has over the years developed a set of disclosure requirements which allow the

market participants to assess key pieces of information of capital adequacy, risk

exposures, risk assessment processes and key business parameters which provide a

consistent and understandable disclosure frame work that enhances comparability. The set

of disclosure requirements listed is intended only to supplement, and not to replace, other

disclosure requirements under relevant legislation or accounting and financial reporting

standards. Where relevant a bank should comply with such other disclosure requirements

as applicable.

In addition to the 16 detailed prescribed schedules to the balance sheet banks are required

to furnish the following information in the ‘Notes to Accounts’.

Table 1.1: List of disclosure items to be disclosed in the ‘Notes on Accounts’ 1. Capital (i) Capital Adequacy Ratio (ii) Capital Adequacy Ratio Tier - I capital (iii) Capital Adequacy Ratio Tier - II capital (iv) Percentage of the shareholding of the Govt. of India in nationalized banks (v) Amount of subordinated debt raised as Tier – 11 capital 2. Investments (i) The gross value of investments in India and abroad. (ii) Provisions made towards depreciation in the value of investments. (iii) Movement of provisions held towards depreciation on investments. 3. Repo Transactions (i) Securities sold under repos (ii) Securities purchased under reverse repo. 4. Non – SLR Investment Portfolio (i) Issues composition of Non – SLR investment (ii) Non-performing Non – SLR investments 5. Derivatives (i) Forward Rate Agreement / Interests Rate Swap (ii) Exchange traded Interests Rate Derivatives


18

(iii) Disclosure on risk exposure in derivatives 6. Non–Performing Assets (i) Percentage of Net NPAs to Net advances (ii) Movement in NPAs (iii) Amount of provisions made towards NPAs (iv) Movement of provisions held towards NPAs 7. Details of loan assets subjected to restructuring

8. Details of financial assets sold to securitization / Reconstruction Company for Asset reconstruction

9. Details of Non-performing financial assets purchased/sold 10. Provision on standard asset 11. Business Ratio (i) Interest income as a percentage to working funds (ii) Non-interest income as a percentage to working funds (iii) Operating profit as a percentage to working funds (iv) Return on assets (v) Business per employee (vi) Profit per employee 12. Asset Liability Management (i) Maturity pattern of loans and advances (ii) Maturity pattern of investment securities (iii) Maturity pattern of deposits (iv) Maturity pattern of borrowings (v) Foreign currency assets and liabilities 13. Exposures (i) Exposure to real sector (ii) Exposure to capital market (iii) Exposure to country risk (iv) Details of Single Borrower Limit, Group Borrower Limit exceeded by Bank 14. Miscellaneous (i) Provision made for Income Tax during the year (ii) Disclosure of penalties imposed by RBI 15. Disclosure requirements as per accounting standards 16. Additional Disclosures (i) Disclosure of ‘Provisions and contingencies’ (ii) Disclosure on floating provision


19

(iii) Disclosure on draw down of reserves (iv) Disclosure of complaints (v) Disclosure of letters of comforts issued by banks Source: Master Circular – Disclosures in financial statements – Notes to Accounts, 2008

1.3.4 Securities and Exchange Board of India (SEBI)

The stock exchanges also have significant bearing on the disclosure information. They

can prescribe the information to be disclosed in the annual reports. For example the

companies, such as Infosys, Satyam, Dr. Reddy’s Lab and Wipro recast their financial

statements as per US GAAP and present this information in their annual reports as these

companies are listed on NYSE / NASDAQ and The Securities and Exchange Commission

(SEC) requires the compliance and disclosure with such GAAP.

The Government of India established the Securities and Exchange Board of India (SEBI)

on the pattern of SEC of USA. SEBI was constituted on April 12, 1988 as supervisory

body to regulate and promote securities markets. It became a statutory body on passing of

the Securities and Exchange Board of India Act in 1992. One of the specific objective of

SEBI is to provide a high degree of protection to the rights of investors and their interests

through adequate, accurate and authentic information and its disclosure on a continuous

basis. It has laid down disclosure requirements as far as annual reports of corporate

entities are concerned, which are enforced through the stock exchange listing agreements.

In respect of annual report disclosures, SEBI has laid down through listing agreements by

companies with stock exchanges the following main disclosure requirements:

Cash Flow Statement: As per clause – 32, every company listed on the stock exchanges

will annex a cash flow statement (as prescribed by AS-3) providing information in

respect of operating, investing and financing activities carried out during the financial

year along with figures for the previous year as in case of other financial statements.

Corporate Governance Report: The genesis of corporate governance lies in business

scams and failures. The failure of several renowned companies in UK viz. Maxwell,

BCCI, Poly pack, Exco, Coloroll and and their collapse in the late 1980’s and the early

resulted in the setting up of the Cadbury Committee in UK in May 1991 as the impact of

the series of financial scandals were severe on the British economy and society as a

whole. The committee chaired by Sir Adrian Cadbury was formed by the Financial

Reporting Council, the London Stock Exchange, and the accountancy profession to


20

address the financial aspects of corporate governance. The committee issued a draft report

for public comment on 27 May 1992.

The SEBI is entrusted with the task of overhauling the process of corporate governance

practices in India. Over the last decade SEBI has performed well and has formed various

committees to look into the ways and means to regulate the corporate governance practice

in India. On the recommendations of Kumar Mangalam Birla Committee, SEBI

introduced Clause 49 in February 2000. The clause 49 of the listing agreement, which

deals with the corporate governance issues lays down that every company listed on stock

exchange or getting listed shall have a separate section on ‘Corporate Governance’ in its

annual report with a detailed compliance report on corporate governance. Non-

compliance of any mandatory requirements with the reasons thereof, and the extent to

which the non-mandatory requirements have been adopted should be specifically

highlighted. The annexure-2 of clause 49 of the listing agreement gives the suggested list

of items to be the part of corporate Governance report. The major items to be included in

the report are :-

A statement on company’s philosophy on ‘Corporate Governance’.

Board: composition, attendance of each member at the Board meetings and last

AGM, other directorships and memberships of Board committees, and number

and dates of Board meetings held.

Audit committee: composition terms of reference meetings and attendance details.

Remuneration committee: composition, terms of reference, attendance,

remuneration policy and details of remuneration to the directors.

Shareholders committee: composition, number of complaints received and solved

and number of pending share transfers.

General Body meetings: location and time details of last three AGMS held,

special resolutions put through postal ballot, procedure adopted and the person

conducting the postal ballot, and details of voting pattern.

Disclosures: on materially significant related party transactions, details of non-

compliance by the company with any requirement, and the penalties and strictures

imposed by the SEBI, stock exchange or any other statutory authority during the

last three years.


21

Means of communication: detail regarding half-yearly report sent to each

household of shareholders, quarterly results, newspapers in which results

published, website of the company, presentations made to institutional investors or

to analysts, and whether ‘Management Discussion and Analysis’ is a part of

annual report or not.

General shareholder information: AGM information with date, time and venue,

financial calendar, dates of book closure, dividend payment date, listing details,

stock code, market price data, performance as compare to broad based indices

such as BSE sensex, registrar and transfer agents, share transfer system,

shareholding distribution, dematerialization, outstanding GDRs/ADRs/warrants or

convertible instruments, plant locations, and address for correspondence.

The company must also obtain a certificate from either the auditors or practicing

company secretaries regarding compliance of conditions of corporate governance

as stipulated in this clause, and annex the certificate with the director’s report,

which is sent annually to all the shareholders of the company. The same certificate

must also be sent to the stock exchanges along with the annual report filed by the

company.

Effective corporate governance is necessary for commercial banks if they have to grow

and compete successfully in liberalized environment. Governance for banks assumes

special significance for the fact that they accept and deploy large amount of

uncollateralized public funds and leverage such funds through credit creation, as also

administer the payment mechanism. Governance in banks is a considerably more complex

issue than in other sectors. Public sector banks attempt to comply with the same codes of

board governance as other companies, but, in addition, factors like risk management,

capital adequacy and funding, internal control and compliance all have an impact on their

matrix of governance.

1.3.5 The institute of Chartered Accountants of India (ICAI)

It is a premier professional accountancy body in India. It plays a significant role in

regulating the corporate disclosure practices in India. The institute is one of the members

of the international accounting standards committee (IASC) and has agreed to support the

objectives of IASC.


22

Having recognized the fact that different accounting and reporting practices are followed

by the corporate sector in India, ICAI constituted the Accounting Standards Board (ASB)

in April 1977. The basic objective of ASB is to harmonize the diverse accounting policies

and practices being followed by companies in India keeping in view the international

developments in the field of accounting. To achieve this objective ASB has undertaken to

formulate and popularize the accounting standards and to persuade the concerned parties

to adopt them in the preparation and presentation of the financial statements. ASB has

issued 32 accounting standards till now. A list of these accounting standards is presented

below:

AS-1 Disclosure of Accounting Policies

AS-2 Valuation of inventories

AS-3 Cash Flow Statements

AS-4 Contingencies and Events occurring after the Balance sheet date.

AS-5 Net profit & loss for the period, prior period items and changes in

accounting policies.

AS-6 Depreciation accounting

AS-7 Accounting for construction contracts

AS-8 Accounting for Research and Development

AS-9 Revenue Recognition

AS-10 Accounting for fixed assets

AS-11 Accounting for the effects of changes in foreign exchange rates.

AS-12 Accounting for Government grants

AS-13 Accounting for investments

AS-14 Accounting for Amalgamations

AS-15 Accounting for Retirement Benefits in the financial Statements of

Employers

AS-16 Borrowing costs

AS-17 Segment reporting

AS-18 Related Party Disclosure

AS-19 Leases

AS-20 Earning per share

AS-21 Consolidated Financial Statements

AS-22 Accounting for taxes on income


23

AS-23 Accounting for investments in associates in consolidated financial

statement

AS-24 Discontinuing operations

AS-25 Interim financial reporting

AS-26 Intangible assets

AS-27 Financial reporting of interests in joint ventures

AS-28 Impairment of assets

AS-29 Provisions, contingent liabilities and contingent assets

AS-30 Financial Instruments: Recognition and measurement

AS-31 Financial Instruments: Presentation

AS-32 Financial Instruments: Disclosures

ICAI requires that while discharging their attest function, it will be the duty of the

members of the institute to examine whether these accounting standards have been

followed in the preparation of financial statements covered by their audit. In the event of

any deviation from these standards, it will be their duty to make adequate disclosures /

qualifications in their audit reports so that the users of financial statements may be made

aware of such deviations. However, while making a disclosure / qualification in the audit

report, the auditor should consider the materiality of the relevant items.

Besides these accounting standards the institute has also assumed some exposure drafts,

guidance notes and expert opinions on various controversial issues in accounting and

reporting. The adoption of these shall make the financial statements comparable and more

relevant to their users.

With a view to promote better standards, recognize and encourage excellence in the

presentation of information in the annual reports, the Institute of Chartered Accountants

of India has been holding an annual competition for the “ICAI awards for excellence in

Financial Reporting.” This competition is held in three categories of organizations as

follows:

Category I: Non-financial public and private sector enterprises (other than those

covered by category III).

Category II: Financial institutions in public, private and co-operative sector, such as

banks, insurance companies, NBFCs etc.


24

Category III: Not for profit organizations including companies registered under section

25 of the companies Act, 1956 educational and research institutions and

trusts.

The institute also organizes a number a seminars, workshops and conferences covering

different aspects of disclosures every year. These programs are specifically conducted for

the members of the institute and the officials working in different organizations who are

related to the preparation of the corporate annual reports one way or the other.

The ICAI has clarified that it will issue the accounting standard for use in the presentation

of the general purpose financial statements issued to the public by the commercial,

industrial or business enterprise. These accounting standards are applicable to public

sector companies, private sector listed companies, large borrowers of banks from banks

and financial institutions in the corporate sector, societies, partnership firms, trusts, HUF

etc. General purpose financial statements include the balance sheet, the profit loss

statement and other statements and explanatory notes which form part thereof, and are

issued to external financial users, e.g. shareholders, creditors, employees and the public at

large. Banks are also required to comply with these accounting standards. There are few

accounting standards where RBI has issued guidelines in respect of disclosure items for

‘Notes to accounts which are as follows:

2.5.1 Accounting Standard 5 - Net Profit or Loss for the period, prior period items

and changes in a accounting policies: Since the format of the profit and loss account of

banks prescribed in Form B under Third Schedule to the Banking Regulation Act 1949

does not specifically provide for disclosure of the impact of prior period items on the

current year’s profit and loss, such disclosures, wherever warranted, may be made in the

Notes on Accounts to the balance sheet of banks.

2.5.2 Accounting Standard 9 – Revenue Recognition: This Standard requires that in

addition to the disclosures required by Accounting Standard 1 on ‘Disclosure of

Accounting Policies’ (AS 1), an enterprise should also disclose the circumstances in

which revenue recognition has been postponed pending the resolution of significant un

certainties.

2.5.3 Accounting Standard 15 – Employee Benefits: Banks may disclose the change in

accounting policy in the appropriate schedule relating to ‘Significant changes in

Accounting Policies’ / ‘Principle Accounting Policies’. The Board of Directors of a bank


25

must disclose the accounting policies followed in respect of VRS expenditure. If VRS

applications were accepted subsequent to the closure of the accounting year the Board of

Directors would be required to make a disclosure in the Board Report of that fact and of

the likely impact of the VRS.

2.5.4 Accounting Standard 17 – Segment Reporting: While complying with the

accounting standard, banks are required to adopt the following:

a) The business segment should ordinarily be considered as the primary reporting

format and geographical segment would be the secondary reporting format.

b) The business segment will be ‘treasury’, ‘Corporate/Wholesale Banking’, ‘Retail

Banking’ and ‘other banking operations’.

c) ‘Domestic’ and ‘international’ segments will be the geographic segments for

disclosure.

d) Banks may adopt their own methods, on a reasonable and consistent basis, for

allocation of expenditure among the segments.

2.5.5 Accounting Standard 18 – Related Party Disclosure: This Standard is applied in

reporting related party relationships and transactions between a reporting enterprise and

its related parties. The disclosure format recommended by the ICAI has been suitably

modified to suit banks.

2.5.6 Accounting Standard 21 – Consolidated Financial Statements (CFS): As

regards disclosures in the ‘Notes on Accounts’ to the Consolidated Financial Statements,

banks may be guided by general clarifications issued by Institute of Chartered

Accountants of India from time to time.

A parent company, presenting the CFS, should consolidate the financial statements of all

subsidiaries-domestic as well as foreign, except those specifically permitted to be

excluded under the AS-21. The reasons for not consolidating a subsidiary should be

disclosed in the CFS. The responsibility of determining whether a particular entity should

be included or not for consolidation would be that of the Management of the parent entity.

In case, its Statutory Auditors are of the opinion that an entity, which ought to have been

consolidated, has been omitted, they should incorporate their comments, in this regard in

the “Auditors report.”


26

2.5.7 Accounting Standard 22 – Accounting for Taxes on Income: This Standard is

applied in accounting for taxes on income. This includes the determination of the amount

of the expense of saving related to taxes on income in respect of an accounting period and

the disclosure of such an amount in the financial statements. Adoption of AS 22 may give

rise to creation of either a deferred tax asset (DTA) or a deferred tax liability (DTL) in the

books of accounts of banks and creation of DTA or DTL would give rise to certain issues

which have a bearing on the computation of capital adequacy ratio and banks’ ability to

declare dividends.

2.5.8 Accounting Standard 23 – Accounting for Investments in Associates in

Consolidated Financial Statements: This Accounting sets out principles and procedures

for recognizing, in the consolidated financial statements, the effects of the investments in

associates on the financial position and operating results of a group. A bank may acquire

more than 20 per cent of voting power in the borrower entity in satisfaction of its

advances and it may be able to demonstrate that it does not have the power to exercise

significant influence since the rights exercised by it are protective in nature and not

participative. In such a circumstance, such investment may not be treated as investment in

associate under the Accounting Standard. Hence the test should not be merely the

proportion of investment but the intention to acquire the power to exercise significant

influence.

2.5.9 Accounting Standard 24 – Discounting Operation: Merger / closure of branches

of banks by transferring the assets / liabilities to the other branch of the same bank may

not be deemed as a discounting operation and hence this Accounting Standard will not be

applicable to merger / closure of branches of banks by transferring the assets / liabilities

to the other branches of the same bank. Disclosure would be required under the Standard

only when:

a) discounting of the operation has resulted in shedding of liability and realization of

the assets by the bank or decision to discontinue an operation which will have the

above effect has been finalized by the bank and

b) the discontinued operation is substantial in its entirety.

2.5.10 Accounting Standard 24 – Interim Financial Reporting: The half yearly review

prescribed by the RBI for public sector banks, in consultation with SEBI, is extended to


27

all banks (both listed and unlisted) with a view to ensure uniformity in disclosures. Banks

may adopt the format prescribed by the RBI for the purpose.

2.5.11 Other Accounting Standards: Banks are required to comply with the disclosure

norms stipulated under the various Accounting Standards issued by the Institute of

Chartered Accountants of India.

As already mentioned the ICAI is one of the members of the IASC, and has agreed to

support the objectives of IASC. While formulating accounting standards, the ASB gives

due consideration to international accounting standards (IAS), issued by the IASC, and

tries to integrate them to the maximum extent possible, in the light of the conditions and

practices prevailing in India. IASC came into existence on June 29, 1973, as a result of an

agreement by the accounting bodies in Australia, Canada, France, Germany, Japan,

Mexico, the Netherlands, the United Kingdome and others. Since its inception, IASC has

issued 41 international accounting standards. IAS-30 pertains to the disclosures in the

Financial Statements of Banks and similar Financial Institutions. A brief summary of the

same is given below:

IAS-30: Disclosures in the Financial Statements of Banks and similar Financial

Institutions

This standard prescribes special presentation and disclosure for banks and similar

financial institutions.

A bank's income statement should group income and expenses by nature and should

report the principal types of income and expense.

Income and expense items may not be offset except those relating to hedges, and

assets and liabilities for which the legal right of offset exists.

Specific minimum line items for income and expenses are prescribed.

A bank's balance sheet should group assets and liabilities by nature

Assets and liabilities may not be offset unless a legal right of offset exists and the

offsetting is expected at realization.

Specific minimum line items for assets and liabilities are prescribed.

Disclosures are required for various kinds of contingencies and commitment, include

off-balance sheet items.

Disclosures are required for information relating to losses on loans and advances.


28

Other required disclosure include:

- Maturities of various kinds of liabilities.

- Concentrations of assets and liabilities, and off-balance sheet items.

- Net foreign currency exposures.

- Market values of investments.

- Amounts set aside as appropriations of retained earnings for general banking

risks.

- Secured liabilities and pledges of assets as security.

International Accounting Standards were issued by IASC from 1973 to 2000. The

International Accounting Board (IASB) replaced IASC in 2001. Since then IASB has

amended some IASs and has proposed to amend others, has replaced some IASs with new

International Financial Reporting Standards (IFRS) and has adopted or proposed certain

new IFRSs on topics for which there was no previous IAS. IAs 30 is now superseded by

IFRS 7: Financial Instruments: Disclosures. IFRS issued by the IASB are increasingly

being recognized as the global FRS. Convergence with IFRS has gained worldwide

momentum in recent years. ICAI has decided to converge its accounting standards with

IFRS for accounting period commencing on or after 1st April 2011 for listed entities and

other public interests entities such as banks, insurance companies and large sized entities

for smooth transition to IFRS.

1.3.6 BASEL NORMS

The Basel Committee on Banking supervision (BCBS) was established in 1971 by the

Bank of International Settlements (BIS) - an international organization founded in Basel,

Switzerland in 1930 to serve as a bank for central banks. Basel Committee on Banking

Supervision is a committee of bank supervisors consisting of members from each of the G

10 countries. It is represented by central bank governors of each of the G 10 countries.

In 1988, the BCBS came out with its recommendations for a set of minimum capital

requirements for banks, which came to be known as the Basel Capital Accord (Basel I).

Focusing primarily on credit risk, Basel I made a clear distinction between the credit risk

of various entities such as a sovereign, a bank, mortgage obligations from non bank

private sector and commercial loan obligations. In principle, Basel I classified bank assets

into five risk groups, which carried respective credit risk weights of 0 percent 10 percent,


29

20 percent, 50 percent and 100 percent, based on which the minimum capital

requirements of a bank was to be calculated. Generally Government – held securities

were attributed a zero risk while bank borrowings (20 per cent) and loan to others (50-100

per cent) were attributed higher risks. Banks were advised to hold capital equal to 8 per

cent of the risk weighted value of assets. The accord also provided a detailed definition of

capital, with Tier 1 or core capital (which included equity and disclosed reserves), and

Tier 2 or supplementary capital (included undisclosed reserves, hybrid capital instruments

and subordinated debts).

The accord brought some sense of standardization and equality among the banks. It made

the banks and the central banks around the world more willing to talk about the embedded

risks in banking and to work towards developing metrics for measuring credit risks and

carrying capital to cushion against it. However, it has been felt over the years that Basel I

accord was a good first step, but not sufficient to take care of the fast rising complexities

in credit risk management. For instance, it had a one- size-fit-all approach for capital

regulation, and did not adequately differentiate credit risk across exposures from a stand

point of likely losses that could arise. Basel I requires banks too classify all commercial

loans into five categories of borrowers on the basis of the nature of ownership of the

entities rather than on their inherent creditworthiness, based on which the capital

requirement for the bank would be computed. Further, the capital requirements did not

take into account the collateral offered or the covenants that formed that formed a part of

the transaction.

To set right these deficiencies, the Basel Committee issues a proposal in June 1999 for a

New Capital Adequacy Framework to replace the 1988 framework. Following extensive

interactions with banks and industry groups worldwide, the proposal underwent couple of

revisions at its drafting stage and the final version – ‘International Convergence of

Capital Measurement and Capital standards – A Revised Framework’ was issued by the

BCBS in June 2004 (Basel II).

Basel II is based on three pillars that allow banks and supervisors to evaluate properly the

various risks that banks face. These three pillars are:

1. Minimum capital requirements

2. Supervisory review of an institution’s capital adequacy and internal assessment

process


30

3. Market discipline through effective disclosure to encourage safe and sound

banking practices.

These three pillars are mutually reinforcing and contribute to safety and soundness in

financial system.

Table 2.2 depicts the three pillars that Basel II ushered in as a substantial mark up over

Basel I.

Table 1.2: Pillars of Basel III PILLAR 1 PILLAR 2 PILLAR 3

1. Minimum Capital Requirements

2. Supervisory Review of Capital Adequacy

3. Market Discipline

Sets minimum acceptable capital

Credit risk tied to ratings o Public ratings o Internal ratings

Explicit treatment or Operational Risk o Excludes “Business

Risk”

Banks must assess solvency to their solvency to their risk profile

Supervisors should review bank’s assessment

Banks should hold in excess level of capitals

Regulators will intervene if capital levels deteriorate

Increased disclosure of capital structure

Improved disclosure or Risk Measurement and management practices

Improved disclosure of risk profile

Improved disclosure of capital adequacy

Source: Rao, 2005

Pillar 1 – Minimum Capital Requirements

The prescription of minimum capital requirement is nothing new. Basel I since 1988 has

been in operation requiring banks to maintain minimum 8 per cent capital adequacy ratio.

This minimum capital otherwise known as regulatory capital acts as sort of insurance for

the interest of the depositors. Basel Committee, while initially suggesting aforesaid

regulatory capital towards credit risk subsequently in 1996 covered market risk

transactions. Now in accord II regulatory capital requirement for operational risk has also


31

been prescribed. Thus pillar 1 deals with adequacy of capital for the banks build up assets

carrying credit, market and operational risk.

Keeping in view RBI’s goal to have consistency and harmony with international

standards, it has been decided that all commercial banks in India shall adopt standardized

approach for credit risk and basic indicator approach for operational risk. Banks shall

continue to apply standardized duration approach for computing capital requirement for

market risks.

Pillar 2 – Supervisory Review of Capital Adequacy

The role of supervisory review process is viewed as a critical component to other two

pillars, viz. capital requirement and market discipline. Here the new accord stresses the

importance and need for supervisors of banks to take a comprehensive view on how

banks have gone about in handling the risk sensitive issues, risk management, capital

allocation process etc. In this regard the guiding principles for the supervisors are:

a) Banks to hold capital above minimum requirement.

b) Intervention at an early stage to prevent capital from declining below the

benchmark level.

c) Review of internal capital adequacy assessment and strategy.

d) Banks to assess their overall capital in relation to risk profile and supervisors to

review the same.

Pillar II requirements give supervisors, i.e., the RBI, the discretion to increase regulatory

capital requirements. The RBI can administer and enforce minimum capital requirements

for banks even higher than the levels specified in Based II, based on risk management

skills of the bank. RBI will 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.

Pillar 3 – Market Discipline


32

This pillar seeks to bring market discipline through greater transparency by asking banks

to make adequate disclosures for the benefit of shareholders / investors, depositors,

customers, rating agencies, government and policy makers and of course for the

regulators / supervisors. Market discipline has two components:

a) Market signals, manifest from share price movement, banks lending and

borrowing rates etc.

b) Responsiveness of the banks as also the supervisors to the market signals.

Pillar 3 provides a comprehensive menu of public and regulatory disclosures related to

the capital structure, capital adequacy, risk assessment and risk management process to

enhance transparency in banking operations. This pillar is complementary to the first two

pillars and seeks to encourage market discipline and public disclosures, so as to allow

shareholders, stakeholders and market players to know about risk profits and available

capital resources to absorb unexpected losses.

Indian banking companies were required to ensure full implementation of Basel II

guidelines by March 31, 2009. The first phase of Basel II was implemented in India with

foreign banks operating in India and Indian banks having operational presence outside

India complying with the some effective end of March 2008. In second phase all other

scheduled commercial banks (except local area banks and RRBs) were to adhere to Basel

II guidelines by March 31, 2009.

Basel II mandates capital to Risk Weighted assets ratio (CRAR) of 8 per cent and Tier

capital of 6 per cent. The RBI has stated that Indian banks must have a CRAR of

minimum 9 per cent effective March 31, 2009. Further, the Government of India has

stated that public sector banks must have a capital cushion with CRAR of at best 12 per

cent, higher than the thresh old of 9 per cent prescribed by the RBI.

BASEL III

Basel III is a globally regulatory standard on bank adequacy, stress testing and market

liquidity risk agreed upon by the members of the Basel Committee on Banking

Supervision in 2010-11.

This, the third of the Basel Accords was developed in response to the deficiencies in the

financial regulations revealed by the Lates-2000s financial crisis. Basel-III strengthens


33

bank capital requirements and introduces new regulatory requirements on the bank

liquidity and bank leverage. For instance, the change in the calculation of loan risk in

Basel II which some consider a casual factor in the credit bubble prior to the 2007-08

collapse: in Basel II one of the principal factors of financial risk management was out-

sourced to companies that were not subject to supervision: credit rating agencies. Rating

of creditworthiness and of bonds, financial bundles and various other financial

instruments were conducted without supervision by official agencies, leading to AAA

ratings on mortgage-backed securities, credit default swaps and other instruments that

proved in practice to be extremely bad credit risks. In Basel III a more formal scenario

analysis is applied (three official scenario from regulators, with ratings agencies and firms

urged to apply more extreme ones.

Overview

Basel III will require banks to hold 4.5 per cent of common equity (up from 2 per cent in

Basel II) and 6 per cent if Tier I capital (up from 4 per cent in Basel II) of risk-weighted

assets (RWA). Basel III also introduces additional capital buffers, (i) a mandatory capital

conservation buffer of 2.5 per cent and (ii) a discretionary countercyclical buffer, which

allows national regulators to require up to another 2.5 per cent of capital during periods of

high credit growth. In addition, Basel III introduces a minimum 3 per cent leverage ratio

and two required liquidity ratios. The Liquidity Coverage Ratio requires banks to hold

sufficient high-quality liquid assets to cover its total net cash outflows over 30 days; the

Net Stable Funding Ratio requires the available amount of stable funding over a one-year

period of extended stress.

Objectives

Basel III measures aim to:

1. improve the banking sector’s ability to absorb shocks arising from financial and

economic stress, whatever the source

2. improve risk management and governance

3. strengthen banks’ transparency and governance

Thus we can say that Basel III guidelines are aimed to improve the ability of banks to

withstand periods of economic and financial stress as the new guidelines are more

stringent than the earlier requirements for capital and liquidity in the banking sector.


34

Macroeconomic Impact of Basel III

An OECD study released on 17 February 2011, estimates that the medium term impact of

Basel III implementation on GDP growth is in the range of -0.05 per cent to -0.15 per

cent per year. Economic output is mainly affected by an increase in bank lending spreads

as banks pass a rise in bank funding costs, due to higher capital requirements, to their

customers. To meet the capital requirements affective in 2015 (4.5 per cent for the

common equity ratio, 6 per cent for the Tier I capital ratio), banks are estimated to

increase their lending spreads on average by about 15 basis points. The capital

requirements affective as of 2019 (7 per cent for the common equity ratio. 8.5 per cent for

the Tier I capital ratio), could increase bank lending spreads by about 50 basis points. The

estimated affects on GDP growth assume no active response from monetary policy. To

the extent that monetary policy will no longer be constrained by the zero lower bound, the

Basel III impact on economic output could be offset by a reduction in monetary policy

rates by about 30 to 80 basis points.

Basel III is an opportunity as well as challenge for the banks. It can provide a solid

foundation for the next developments in the banking sector, and it can ensure that past

excesses are avoided. Basel III is changing the way that banks address the management of

risk and finance. The new regime seeks much greater integration of the finance and risk

management functions. This will probably drive the convergence of the responsibilities of

the CFOs and CROs in delivering the strategic objectives of the business. However, the

adoption of a more rigorous regulatory stance might be hampered by a reliance on

multiple data silos and by a separation of powers between those who are responsible for

finance and those who manage risk. The emphasis on risk management that is inherent in

Basel III requires the introduction of evolution of a risk management framework that is as

robust as the existing finance management infrastructures. As well as being a regulatory

regime, Basel III in many ways provides framework for true enterprise risk management,

which involves covering all risks to the business.

Summary:


35

In the end it can be summarized that banks today are not merely economic entities but

they are the pillars on which the overall financial economic growth depends. A

transparency in banks disclosures further reduces the level of information asymmetry and

hence boosts the investors’ confidence in the banking industry. But such banking

disclosures in India are regulated by the Banking Regulation Act 1949, the Companies

Act 1956, the RBI, the ICAI, the SEBI and the recommendations of the Basel Committee.

The Banking Regulation Act 1949 provides a framework for the regulation and

supervision of commercial banking activity whereas the Companies act deals with the

state of the banking company’s affairs. RBI the apex financial institution of India, not

only controls but also supervises, promotes, develops and plans the role of commercial

banks through its policies, directions and regulations. Hence it gives a detailed guidance

to the banks in matters of banking disclosures. SEBI on the other hand lays down

disclosure requirements though stock exchange listing agreements via various disclosure

requirements such as Cash Flow Statement and Corporate Governance Report. ICAI a

premium professional accountancy body in India plays an important role in regulating the

corporate disclosure practices in India by issuing various accounting standards. Finally

the Basel Committee on banking supervision gave its recommendations as to how the

banks and supervisors are to evaluate properly the various risks that banks can face. It

based its study on three important pillars: minimum capital requirements, supervisory

review of capital adequacy and market discipline. Only when these three pillars are

mutually reinforced then only they can contribute to the safe and sound banking practices.

1.4 NEED OF THE STUDY

Financial disclosure is an effective communication of accounting information to its users

for decision making. The users of financial statements should be in a position to evaluate

and assess the company’s earnings performance and financial position, so that, they are

able to make intelligent investment decisions necessary for efficient allocation of scarce

resources. The aim of financial disclosure is to portray economic performance of an

enterprise. Financial information can be disclosed by using various modes, but annual

reports occupy a very significant position among them. Today there is general acceptance

of the value of fair reporting in the business community. Fair reporting brings with it

motivation, increased competitiveness, comparability and credence.


36

Banks are also business entities, i.e. they produce and sell financial services instead of

products. The distinctive feature about banks is that they are highly leveraged firms. They

have to foster the well being of shareholders and general public at large. The essential

part of the banking system is its financial viability. It is not only necessary for it’s

survival but also to discharge its various obligations. If a bank goes into trouble the entire

community is affected. Banks subsists on confidence and disclosure of prudent banking

practices is the only way to build confidence.

Further the need of the study was felt because of growing importance of corporate

governance in banks. Governance is a reform package to strengthen the banks and

corporate with the objective of making them more accountable, open, transparent,

democratic and participatory. Governance in banks is considerably a more complex issue

than in other sectors because bank activities are less transparent and thus it is more

difficult for shareholders and creditors to monitor their activities. The core of

governance rests on the quality of transparency and disclosure.

Another area which focuses on the need for present study is Basel II. Managing risk is

increasingly becoming an important issue for the regulators and financial institutions.

Bank regulation is now increasingly getting risk concentric. This process had its origin in

Basel I proposals in 1988. The thrust of first accord was adequate capitalization of banks

in relation to credit risk, the second accord recognizes that banks face a number of risks in

the form of credit, market and operational risk. Basel II is built around three pillars –

minimum capital requirement, supervisory review and market discipline. Pillar three

provides a comprehensive menu of public and regulatory disclosures related to capital

structure, capital adequacy, risk assessment and risk management process to enhance

transparency in banking operations. Thus, Basel II provides a list of desirable best

practices for banking safety and efficiency.

Protecting the interest of the depositors becomes a matter of paramount importance to

banks. Regulators, the world over, have recognized the vulnerability of depositors to the

whims of managerial misadventures in banks and therefore have been regulating the

banks more tightly than other corporate. Thus there seems to be a little question


37

concerning the need for serious research in the area of reporting practices of commercial

banks.

1.5 OBJECTIVES OF THE STUDY The objectives of the study have been as below – 1. To examine the disclosure practices of commercial banks in India over the period of

study.

2. To compare the disclosure practices of selected private sector banks with the public sector banks.

3. To find out highly disclosed and least disclosed elements of banking disclosures. 4. To examine the discriminatory power of total, mandatory and voluntary disclosures

in relation to public and private sector banks.

5. To make suggestions for improving the quality of disclosure.

1.6 HYPOTHESIS

Corresponding to the aforesaid objectives, the following sets of broad hypothesis

1. Ho (1) : There are no significant differences in the disclosure practices of public

sector banks and private sector banks.

Ha (1) : There are significant differences in the disclosure practices of public sector

banks and private sector banks.

2. Ho (2) : There are no significant differences in the reporting of various elements of

banking disclosures.

Ha (2) : There are significant differences in the reporting of various elements of



38

CHAPTER 2 REVIEW OF LITERATURE

It is a known fact that education is a social activity and no research whatsoever can be

conducted in isolation. Every scholar is therefore deeply indebted to his predecessors in

the field who have already conducted related studies and brought to light hitherto

unrevealed aspects of the subject matter in hand. It is only after reviewing the existing

literature on the subject that one can gauge the gap where further research is required or

identify the lacunae in previous studies and make an attempt to overcome them by

undertaking one’s own study.

A number of studies have been conducted in India and abroad with a view to examine the

information needs of different user groups like investors, financial and security analysts,

public accountant and auditors, creditors etc. as well as to evaluate the quantitative and

qualitative status of corporate financial reporting and disclosures. A brief overview of

such studies and research papers is being presented below:


39

Copeland and Fredericks (1968) examined the relation between materiality and

disclosure with aggregate data from 200 companies. The research design consisted of the

selection of a variable, a measurement of its materiality and disclosure, and a comparison

of the two measures. The variable selected was changes in common stock because –

changes affect individual stockholders interest in a company’s assets and earnings, and

data concerning materiality and extent of disclosure can be obtained independently of

each other. The tests found a positive correlation between materiality and disclosure but

the correlation coefficient was insignificant at the 0.5 level.

Singhvi and Desai (1971) undertook an empirical analysis of the quality of corporate

financial disclosures in annual reports of 100 listed and 55 unlisted American

corporations for the year 1965-66 by using an index of disclosures containing 34 items.

They also studied the influence of various variables like – asset size, number of

shareholders, listing status, CPA (certified public accountant) firms, rate of return and

earnings margin on the quality of disclosures. The findings of the study demonstrated that

corporations disclosing inadequate information were likely to be small in size, free from

listing requirements, audited by a small CPA firm and less profitable. It also empirically

showed that inadequate corporate disclosures in annual reports were likely to widen

fluctuations in the market price of a security. Thus, the quality of disclosure was one of

the variables affecting the price of a security.

Baker and Haslem (1973) examined the information needs of individual investors in

common stock. A survey was conducted on a sample of 1523 individual common stock

investors. The data was gathered by means of a questionnaire including 33 items of

information used in investment analysis, with respondents indicating the relevance of

each factor on a 5-point scale. Interpretation of findings was based on the arithmetic mean

of responses and its standard deviation for each of the 33 factors. The authors observed

that corporate management paid inadequate attention to the needs of equity investors.

They further concluded that investors made investment decisions on the basis of

expectations of future economic outlook of the company and industry, earnings and sales

forecast and the quality of management. The study also revealed that individual investors

had information needs different from the professional analysts. They considered stock


40

brokers followed by advisory services and newspapers as important source of corporate

information, while attaching minor importance to financial statements in annual reports.

Buzby (1974) in his study indicates that many items which financial analysts believe to be

important are inadequately disclosed. A list of 38 items of financial and non-financial

information which might appear in an annual report has been constructed. The relative

importance of each of the items has been estimated by a survey of financial analysts.

They were to rate each factor on a scale of 0 to 4. On the basis of survey responses a

detailed set of weighted disclosure index for each of the items was constructed. It was

then applied to a sample of annual reports for 88 small and medium sized companies. The

results indicated that many of the items were inadequately disclosed in the sample. It was

concluded that an opportunity exists for an expansion of the extent of disclosure in the

annual reports of small and medium sized companies.

Chandra Gyan (1974) made an attempt to examine whether those who attest the

corporate reports and those who use such reports, i.e. the public accountants and the

security analysts respectively, have any consensus about the value of information

included in the published corporate annual reports. The test vehicle of the study was

questionnaire containing 58 information items nailed to public accountant and security

analysts. The study concluded that accountants generally do not value information for

equity investment decisions the same as security analysts do. Thus there was lack of

consensus.

Barrett’s (1976) study focused on the overall extent of financial disclosures and the

degree of comprehensiveness of firms financial statements –reflected in the annual

reports of 103 major firms located in US, UK, Japan, France, Germany, Sweden and

Netherlands for years 1963 to 1972. The results indicated that while the overall level of

financial disclosures steadily improved from 1963 to 1972, there still existed a wide

variance between the disclosure levels of American and British firms, on one hand, and

those in the rest of countries, on the other. Also, the American and British firms financial

statements were considerably more comprehensive in terms of including the results of

related companies and taking or broad view of income related items, than that of firms in

other five countries. The findings of the study were certainly consistent with the general


41

belief that there existed a link between the quality of financial reporting practice and the

degree of efficiency of national equity markets, which supported the position that

continental European equity markets were less efficient than their Anglo-American

Counterparts.

Siegal and Dauber (1976) in their article try to determine the true nature of adequate

disclosure. The article further states that adequate disclosure can be achieved by

extending current disclosure standards. Forecast disclosures, social accounting, segment

reporting, price level restatement and human resource accounting are few possible

extensions. At the end it has been concluded that accounting profession can expect an

expansion of disclosure requirements in light of the pressures exerted by government

agencies, security analysis, investors and the like.

Siegal and Vissichelli (1978) are of the view that information should be presented in a

way that facilitates understanding and avoids erroneous implications. Due care must be

taken in giving too little information to readers of financial statements as well as too

much information. At the end it is concluded that disclosure is attempting to give the

investor all the information he needs in order to make the best possible decisions with

respect to his past, present and future investments.

Kahl and Belkaoui (1981) investigated the annual reports of 70 commercial banks from

18 countries during 1975. Disclosure adequacy was measured by the extent to which 30

selected information items were presented in the annual reports. Differences were found

to exist in disclosure adequacy internationally. U.S. banks, it was learned, were leaders in

the extent of disclosure. The positive correlation between asset size and extent of

disclosure was supported by the evidence in this study. The information items used in the

study to measure disclosure adequacy, when classified according to the consensus

between producers and users of bank financial statements, indicate ten items of low

consensus.

Khanna and Singh (1981) analyze the relationship between disclosure of marketing

information and different organizational correlates like age, size, profitability and type of

industry. For this annual reports of 45 companies for 1976-77 were selected as a sample


42

for the study. It comprised of private enterprises operating in different industries. To

identify important marketing information to be disclosed an index of disclosure of 50

items was prepared. Weight age ranging from one to five was assigned to these items

depending upon their relative importance. Chi-square test and t-test was applied to test the

significance of null hypothesis. With the help of statistical tools it was concluded that

marketing information disclosure differs from company to company in most cases. Net

worth, net sales, total assets, net profit, rate of return sum to influence the disclosure of

marketing information whereas age earning margin, nature of industry and ownership do

not influence the marketing information disclosure.

Patell and Wolfson (1982) examine firms’ behavior with respect to the systematic

intraday timing of earnings and dividend announcements. It tests the hypothesis that good

news is more likely to be released when the security markets are open while bad news

appears more frequently after the close of trading. Both endogenous (stock price change)

and exogenous (comparison to the preceding period’s earnings or dividends)

classifications are used to distinguish good news from bad, and both forms support the

hypothesis. An information content analysis using daily stock price data is performed to

illustrate how differences in disclosure timing may affect inferences about the magnitude

of stock price response, announcement, anticipation or news leakage and the speed of

price adjustment.

McNally, Hock and Hasseldine (1982) studied three aspects of discretionary disclosures

of financial and non-financial information – examining the importance of disclosing

selected items of information by surveying the attitudes of two groups of external users,

namely financial auditors and stock exchange members; examining the disclosure

practices of manufacturing companies listed on the New Zealand Stock Exchange; and

ascertaining the association between disclosure practices and selected corporate

characteristics. The respondents were asked to score the relative importance of 41

information item (financial and non-financial) on a 5-point scale High scoring items

included future dividends, profit forecasts historical summary of operating and financial

data, capital expenditure and EPS; moderately important included indicators of employee

morale, number and type of shareholders, age of debtors, company’s history etc., while

the least important was information on corporate social responsibility. Thus, a


43

considerably divergence was observed between the degree of disclosure practiced by the

companies and that perceived by the external users.

Lal (1982) conducted the study to determine the adequacy of disclosure in annual reports

of Indian Companies so that efforts can be made to improve the quality of disclosures

therein. An index of disclosures consisting of 50 items (104 with sub items) was prepared.

This index was applied to the annual reports of 180 manufacturing companies for the

years 1965 and 1975. The study concluded that a large number of items of information

are not being disclosed by the Indian Companies. Hence, there is great need for

improving the quality of disclosure in corporate annual reports.

Maloo (1986) made an attempt to determine whether or not the accounting profession has

arrived at a consensus as to the meaning of the phrase ‘adequate disclosure’. He tries to

answer the questions what, when, how much, how should and for whom the information

to be disclosed. The article further states that there are no pat answers to these questions.

Further more, there are those who feel that disclosures, other than voluntary, are totally

unnecessary. At the end it is concluded that there is no real consensus as to what

constitutes adequate disclosure.

Chow & Wong-Boron (1987) studied the extent of voluntary financial disclosures by a

sample of 52 Mexican Stock Exchnage – listed firms and tested the influence of three

variables suggested by the Agency Theory – firm size, financial leverage and proportion

of assets in place – on the disclosure level. Using an index of 24 information items, it was

found that voluntary disclosures vary widely within the sample. While items like names

of company directors, inventory accounting method, amount of pension fund liability,

depreciation method and breakdown of borrowings were disclosed by a majority of the

firms, however, none revealed items like cash projections, responsibilities and experience

of key executive and personnel, principal business or professional affiliations of outside

directors and earnings breakdown. The results of the regression analysis indicated that the

extent of voluntary disclosures was positively and significantly related to firm size but not

to financial leverage or assets in place.


44

Gibbins, et .al., (1990) interviewed representatives from 11 disclosing firms and 9

external organizations over the period 1985 -1986. An inventory of the results of the

interviews was maintained on both the disclosure media and topics disclosed. A two-

dimensional internal preference for managing disclosures was developed. The first

dimension measured the degree of uncritical acceptance of rules and norms; the second

dimension measured the propensity to seek firm-specific advantage vis-à-vis how

disclosures were made and interpreted.

Eresi (1996) in his article examined the extent to which companies are environmentally

sensitive and ascertained the extent and different forms of disclosure of information on

environment. A study of the annual reports of 68 companies was made for the years 1991-

92 and 1992-93. He concluded only 30 percent of the sample companies disclosed

environment information that to with reference to protection of environment, pollution

control, conservation of energy and raw materials. Environmentally sensitive companies

shared only positive information. The extent of disclosure remained less than one-fourth

page.

Lang and Lundhlom (1996) examines the relations between the disclosure practices of

firms, the number of analysts following each firm and properties of the analyst’s earnings

forecasts. Data from the report of Financial Analysts Federation corporate Information

Committee (FAF Report 1985-89) have been used. Results indicate that firms with more

informative disclosure policies have a large analysts following, more accurate analyst

earnings forecast, less dispersion among individual analyst forecasts and less volatility in

forecast revisions. Further it has been suggested that potential benefits to disclosure

include increased investor following, reduced estimation risk and reduced information

asymmetry.

Venkatesh (1997) examines the important issue of mandatory vs. voluntary disclosure.

Admitting that mandatory requirements improve credibility, ensure minimum disclosure

and facilitate standardization for easy interpretation and comparability, the author

explains that voluntary disclosure not only does invite positive investor sentiments, but it

also improves chances of attracting foreign funds. It is further stated citing some research


45

studies that there is a positive relation between the company size and the level of

voluntary disclosure.

Ahmed (1997) assesses empirically whether significant association exists between

internal environment and accounting regulations in developing countries. The five

selected environmental variables are type of economy, equity market capitalization,

turnover of shares, uncertainty avoidance and individualism. The paper argues that since

the accounting systems in developing countries are predominantly imposed by or

imported from developed countries, rather than evolved within these countries, no

significant relationships are expected to be found between disclosure regulations and

internal environmental factors. The results are consistent with the hypothesis and the

multiple regressions showed no significant association between disclosure regulations and

internal environmental factors.

Wallman Steven M.H (1997) examines the impact of changes in information technology

on the future of accounting and financial reporting. Accounting is divided into two

primary functions ‘compiling’ and ‘attestation’. Information technology will assume an

enhanced role with respect to the former function. Advancements in technology will

increasingly offer users the ability to manage large amounts of disaggregated data. As a

result, rather than rely on traditional financial statements, users would have the

opportunity to access, analyze and focus on data that is most relevant to their particular

needs, including forward looking and soft information. The author also notes the benefits

that would insure to corporations providing information under this new system. The

author also asserts that the attestation function will shift from a focus on attesting the

financial statements to attesting to the procedures and processor used to present data for

access by end users. Under such a changed accounting and information paradigm, the

roles of accountants, standard setters and regulators would undergo substantial change.

Kohli Pooja (1998) analyzed the corporate disclosure practices of the Indian companies

for the year 1994-95. The disclosure level was measured through an index of disclosure

consisting of 212 items classifying them into historical, contemporary and futuristic.

Other objectives of the study included to capture the improvement in disclosure levels of

Indian companies following the liberalization of the economy by making a temporal


46

comparison of years 1990-91 and 1994-95, to compare the timeliness of annual reports of

US and Indian companies; and finally to study the influence of certain corporate

attributed like size, age, profitability, nature of industry and auditing firm on the

disclosure levels and timeliness. While the temporal analysis indicated an improvement in

the disclosure scores of Indian companies post liberalization, the cross national

comparison revealed that Indian companies were far behind their US counterparts in the

overall disclosure levels as well as in timeliness of annual reports. Linear and step wise

regression results reflected that size and age were significant determinants of disclosure

levels as well as timeliness for Indian companies, whereas profitability was the

significantly influencing variable for the US companies.

Baruch and Zarowin (1999) investigated the usefulness of financial information to

investors in comparison to the total information in the market place. They found that there

has been systematic decline in the usefulness of financial information to investors over

the past 20 years, as manifested by a weakening association between capital market

values and key financial variables –earnings, cash flows and book values. This

deterioration in usefulness, in the face of both increasing investor demand for relevant

information and persistent regulator efforts to improve the quality and timeliness of

financial information is due to change. Whether driven by innovation, competition, or

deregulation, the impact of change on firm’s operations and economic conditions was not

adequately reflected by the current reporting system. They linked change empirically to

loss of informativeness of financial data to further validate their conjecture, that business

change is responsible for deterioration in informativeness of financial information. Of the

various change drivers main focus was on intangible investments.

Francis and Schipper (1999) investigate the popular claim that financial accounting

information has become less value relevant over time, especially over the period 1952-94.

Analyses show that return to perfect foresight trading strategies based on the sign and

magnitude of earnings have decreased over the sample period. However returns based on

cash flows and the sign of earnings have not changed significantly over time. Tests

indicate that the explanatory power of earnings level and changes for returns has

significantly decreased over time. Whereas the tests of explanatory power of book values

of assets and liabilities for market equity value provide no evidence of a decline in the


47

explained variability of the balance sheet relation or the book value and earnings relation.

Thus the results overall provide a mixed evidence on whether financial reports have lost

relevance over the 1952-94 period.

Dhar (2001) examined the relevance of Indian corporate annual reports to individuals

from various angles i.e. from the frequency of their use, reasons for non-usage, usage

according to age and profession, degree of comprehensibility, perception about different

indicators, and investors need for summary reports and forecasts. Data was collected

through responses to a questionnaire survey of 193 respondents. The results revealed that

complexity in annual reports and lack of expertise naine investors has reduced their

importance to only a secondary source, with financial magazines and newspaper being

tapped as major sources of investment information. The primary reason cited being that,

investors found information content of these reports not relevant for investment decisions

or movement of share prices. The findings also indicate a significant positive association

between level of investment and frequency of use of annual reports, with investors having

commerce background comprehending them better than others. The survey results

revealed that indicators concerning shares are considered to be more important than

profits, changes in profits and sales. Also, majority of the respondents favored receiving

summary annual reports and forecasts of share prices, dividend and EPS in the annual

reports.

Papas (2002) assesses the compliance of non-financial Greek firms with statutory

disclosure requirements and examines the impact of market factors and firm

characteristics on disclosure policies. Disclosure was measured against an index of 76

information items. A regression model was used to determine which of the independent

variables explain the variation in the index better. The causes of the observed departures

from mandatory disclosures were examined by means of an interview survey. Results

show that not all sample firms comply with the statutory disclosure requirements. The

extent of disclosure in their annual reports was found to be significantly associated with

their listing status and state of international affiliations.

Kant (2002) ascertained the disclosure levels of companies for the years 1995-96 and

19999-2000 and studied the influence of certain corporate attributes on the disclosure


48

levels. The level of disclosure was studied with the help of Disclosure Index of 275 items.

Another objective was to develop a framework for the measurement of the quality of

corporate governance and to measure the quality of governance in the selected

companies. Another objective was to establish and analyze the relationship of corporate

disclosure, quality of governance and shareholder value. The results indicate that

disclosure of the companies under study have improved over a period of time.

Improvement across all groups into which disclosure items have been categorized in the

‘disclosure Index’ is also shown. Analysis further shows that size is positively associated

with disclosure. The quality of governance in case of companies covered under the study

has been found to be reasonably good. The relationship analysis makes it amply clear that

there exists a positive and significant relationship between and among disclosure, quality

of governance and shareholder value.

Chipalkatti (2002) in his paper investigates whether enhanced transparency in the case of

Indian Banks is indeed rewarded with increased market liquidity. It also examines the

markets reaction to the enhanced disclosure requirements as required by Reserve Bank of

India guidelines. Indian case, enhanced transparency had no significant impact on the

market liquidity of private sector banks. In the case of public sector banks, it is observed

that enhanced transparency is associated with reduced market liquidity. In addition, no

significant change in the market liquidity was observed with the release of the additional

disclosure information as required by Reserve Bank of India.

Khanna, Palepu & Srinivasan (2004) examines the hypothesis that foreign companies

that have significant interactions with US product, labor and financial markets are more

likely to use US disclosure practices relative to those that do not have such interactions.

These hypotheses are tested using a sample of 794 companies from 24 countries from

Asia, the Asia-Pacific, and Europe. Scores from S & P’s Transparency and Disclosure

Survey for the companies have been used in the analysis. These scores use the US

disclosure standards as an implicit benchmark; therefore they measure the degree of

similarity of a company’s disclosure practices to US practices. To measure the extent of

market interaction with the United States, a variety of country and company level

variables had been collected. The results indicate US listing by a company, the extent of

investment interaction, the extent of operation interaction and the extent of business travel


49

to the United States from the company’s country are all positively associated with the

company’s disclosure scores. No significant association has been found between a

country’s trade with the United State and the disclosure scores of companies in that

country.

Tamboli (2004) analyzed impacts of disclosure and regulatory authorities’ efforts on

investor protection. Study discussed philosophy, concepts, accounting disclosure norms

and actual practices. Based on information collected from 100 respondents, the study

concluded that the individual investors relied highly upon, ‘Materials on Financial

Products’ followed by ‘Annual Reports’ and ‘Verbal Advice’. Investors preferred small

saving schemes than corporate securities followed by consumers durables and real estates.

Personal lending remained at last and least preference. The investors faced grievance on

corporate investments remaining unknown about the right authorities to be approached.

Bibhuti and Patnaik (2004) in their research paper explored the need for companies to

make more information available to the market on a voluntary basis rather than as a

regulatory requirement. By questioning a group of 30 investors and the same number of

analysts they tried to determine whether there is any empirical evidence to the claim that

investors are demanding more information. Their study found out that while a significant

percentage of investors were satisfied with the corporate financial reports, the analysts

were not satisfied with them. EPS (Earnings per share) still remained the most popular

tool of analysis, though now a majority of them were using cash-based valuation

measures and were placing greater emphasis on predictive data having a forward looking

perspective. The study found a significant difference between the traditional reporting and

the requirements of investors and analysts. The authors concluded by recommending a

‘value-reporting’ framework that incorporated both financial and non financial measures

to minimize the gap between intrinsic value of the company and its market value as

perceived by the investors and analysts.

Sahrawat and Davis (2005) investigate the readiness of financial institutions operating

within the banking sector in New Zealand for the transition from existing New Zealand

financial reporting standards and to ascertain how motivated they are to ensure they have

an effective corporate governance regime. Paper also reports on a qualitative investigation


50

of the perceptions of senior management in New Zealand banks on the effects of the

revised standards. For this 16 officials from 8 banks agreed to be part of structured

interviews. From responses it was concluded that the changes required for convergence to

IFRS would be complex but worthwhile exercise. Respondents were aware of the fact that

there would be new financial reporting standards that must be adopted but, overall, there

was a somewhat alarming lack of awareness of the details on how they would impact the

banks’ financial reports, it was concluded that the adoption of IFRS s mean high initial

costs of transition training, setting up systems and processes which may spin off positive

yields in the long term.

Baroko,et.al., (2006) in their examined voluntary disclosure in a developing country,

namely Kenya. Over the last decade the Kenyan govt. has initiated several far reaching

reforms at the Nairobi Stock Exchange in order to mobilize domestic savings and attract

foreign capital investment. These measures include privatization of state corporations

through the stock exchange and allowing foreign investors to own shares in the listed

companies. This study provides a longitudinal examination of voluntary disclosure

practices in the annual reports of listed companies in Kenya from 1992 to 2001. The

results suggest that the extent of voluntary disclosure is influenced by a firms corporate

governance attributes, ownership structure and company characteristics. The presence of

an audit committee is a significant factor associated with the level of voluntary disclosure

and the proportion of no-executive directors on the board is found to be significantly

negatively associated with the extent of voluntary disclosures. The study also finds that

the levels of institutional and foreign ownership have a significantly positive impact on

voluntary disclosure. Large companies and companies with high debt voluntarily disclose

more information. In contrast, board leadership structure, liquidity, profitability and type

of external audit firm do not have a significant influence on the level of voluntary

disclosure by companies in Kenya.

Basu (2006) discusses the potential benefits of having a single, universally accepted

financial reporting language and makes an assessment of the progress that has so far been

made towards the establishment of such a language. At the end he concludes that a

common set of universally accepted accounting standards is a necessary condition for the

orderly development of the global capital markets. However, the financial reporting


51

framework the IASB has developed is not a complete one; it has many gaps and

loopholes.

Rocco (2006) assigned a composite bank disclosure index to each of the 180 countries

surveyed in the study, yearly since 1994. Using a thick box approach to analyze financial

statement of individual banks, the index seeks to quantitatively measure the actual

disclosure practices of commercial banks around the world, in relation to their assets,

liabilities, funding, incomes, and risk profiles. The measurement framework is compatible

with IMF’s Financial Soundness Indicators (FSI) System, as well as Basel committee

prescriptions on bank accounting disclosures. The framework is applicable to banks in

low and mid-income countries. Specific policy prescriptions can be made automatically

based on the sub-index and sub-component scores linked to individual disclosure

categories. The report also utilizes the time-series and cross-sectional variations of the

index to conduct a series of assessment and diagnosis on several systematically important

developing countries and regions, as examples to demonstrate the index’s policy

applications.

Rao,et.al., (2006) have tried to pursue and analyze the changing needs of information

disclosure in accounting. They are of the view that accounting disclosures should be

responsive to the expansion and change of direction of all economic activities. They

studied the global standard setting exercise. They are of the opinion that ethics in

accounting are concerned with the ethical standards of the accountant himself. Some

specific cases of inadequate disclosure in accounts in the form of deliberate contravention

of accounting standards and the consequent absence of ethical values in accounting have

been examined. At the end it has been concluded that incomplete disclosure in reporting

fails to ensure the credibility and reliability of data.

Singh (2007) in his article focused on the financial reporting norms for banks. He

classified the reporting norms into two categories – statutory reporting and non-statutory

reporting. He concluded that most of the banks are disclosing only the statutory items in

their annual reports. He further identified the gap in the compliance of accounting

standard of segment reporting, EPS, Related Party Disclosure, Assets on lease and


52

differed tax liability, etc. He suggested that ICAI should bring an accounting standard

suitable to Indian conditions with the help of RBI.

Singh (2007) examined empirically the non-mandatory disclosure practices of banking

companies in India, both item-wise and bank-wise for the year 2004-05. An index of

disclosure of 21 reporting items was constructed and the annual reports of 40 banking

companies of the public and private sectors were analyzed to check the level of disclosure

of non-mandatory reporting items. The results of the study showed that the level of

reporting of non-mandatory items was very low and wide variation in disclosure score

existed among various banking companies of public and private sector. However, the

banking companies of both the sectors show a great deal of similarity in respect of

reporting non-mandatory information among them.

Schipper (2007) considered required disclosures from both a standard – setting

perspective and a research perspective. Required disclosures mean display in the notes

and supporting schedules that accompany financial statements. The author considered the

purpose of required disclosures and concluded that the purpose is to present items that are

relevant but cannot be measured with the requisite amount of reliability, analysis of

standards revealed that this distinction does not explain existing disclosure requirements.

Further author also concluded that disclosed items are less reliable than recognized items

due to differences in the preparation and auditing of disclosed versus recognized amounts,

as opposed to intrinsic differences. However it was not clear from existing research, why

preparers and auditors might treat recognized items with more care than disclosed items.

However, research suggested that users do in fact process disclosed items differently

from, and probably less thoroughly than, recognized items. It was unclear what causes

this difference, and how much the difference might matter for capital market outcomes. In

particular, processing differences that arise because of lack of financial statement user

attention and expertise are amenable to interventions in the form of better education and

training. On the other hand, processing differences that arise because of cognitive factors

that are impervious to education and incentives might require standard setter

consideration in setting disclosure requirements.


53

Francis,et.al.; (2008) – investigated the relations among voluntary disclosure, earnings

quality, and cost of capital. For this they used a self constructed score of voluntary

disclosures of financial information included in firm’s annual filings. They found that

firms with good earnings quality have more expansive voluntary disclosure than firms

with poor earnings quality. In unconditional tests, it was found that more voluntary

disclosure is associated with a lower cost of capital. However, consistent with the

complementary association between disclosure and earnings quality, they discovered that

the disclosure effect on cost of capital is substantially reduced or disappears completely

once earnings quality is conditioned. Extensions probing alternative proxies show that the

findings were robust to measures of earnings quality and cost of capital, but not to other

measures of voluntary disclosure.

Achalapathi and Devarajan (2008) aimed to study corporate governance practices in

information technology sector. A disclosure index model has been developed to measure

the levels of disclosures. The sample of the study was a list of 20 companies contained in

CNX IT Index. The analysis for governance practices have been studied for the year 2005

and 2006. A disclosure scoresheet was operationally prepared as a checklist for corporate

governance disclosure based on selected information, which may be disclosed in the

company annual report for measuring the extent of disclosure. The disclosure model

measures the total disclosure score of a company each for mandatory and voluntary

parameter. The results show that there is cent per cent compliance with regard to almost

all the mandatory aspects of clause 49. It has been concluded that Disclosure Index model

facilitates well in measuring the level of disclosure in the corporate governance reports.

Bergman and Roychowdhury (2008) examined the relation between investor setiment

and firm disclosure policy. They present evidence that managers strategically vary their

voluntary disclosure policies in response to prevailing sentiment. During low-sentiment

periods, managers increase forecasts to walk up current estimates of future earnings over

long horizons. In contrast, during periods of high sentiment, managers reduce their long-

horizon forecasting activity. Further, while there is an association between sentiment and

the biases in analysts estimates of future earnings management disclosures vary with

sentiment even after controlling for analyst pessimism, indicating that managers attempt

to communicate with investors at large, and not just analysts. Study provides evidence


54

that firms long-horizon disclosure choices reflect mangers desire to maintain optimistic

earnings valuations.

Bogdan,et.al., (2009) aimed to investigate the voluntary disclosure practices among

Romanian listed companies, to measure the voluntary disclosure and to analyze the

influence of ownership structure on the extent of voluntary disclosure of these companies.

The population studied constituted of the first and second tiers listed on the Bucharest

Stock Exchange and the sample is made up by the top fifteen listed companies selected

after market capitalization. The results of exploratory investigation showed a low level of

voluntary disclosed information by the selected companies. In order to test the association

between ownership structure and the extent of voluntary disclosure hypotheses were

drawn. The figures have conducted to the conclusion that companies’ with a majority of

institutional shareholders are disclosing more voluntary information.

Hossain and Hanmami (2009) sets out to examine empirically the determinants of

voluntary disclosure in the annual reports of 25 listed firms of Doha Securities Market

(DSM) in Qatar forming approximately 86 per cent of the total firms incorporated in

DSM. It also reports the results of the association between company-specific

characteristics and voluntary disclosure of the sample companies. A disclosure checklist

consisting of 44 voluntary item of information is developed and statistical analysis is

performed using multiple regression analysis. The findings indicate that age, size,

complexity and assets-in-place are significant and other variable profitability is

insignificant in explaining the level of voluntary disclosure.

Dhaliwal and Yang (2009) examined a potential benefit associated with the voluntary

reporting of corporate social responsibility performance, a reduction in firms’ cost of

equity capital. They found that firms with high cost of equity capital tend to release

corporate social responsibility reports and that reporting firms with relatively superior

social responsibility performance enjoy a reduction in the cost of equity capital. Further,

reporting firms with superior social responsibility performance attract dedicated

institutional investors and analyst coverage. Superior social responsibility performance

also serves to reduce forecast errors and dispersion. Finally, firms appear to exploit the

benefit of a reduction in the cost of equity capital associated with social responsibility


55

reporting: by raising a significantly larger amount of equity capital than non-reporting

firms.

Gao (2009) in his study showed that the argument that disclosure quality improves

investor welfare by reducing cost of capital is valid only in limited circumstances. Based

on a production economy with perfect competition among investors, the analysis

demonstrated three points. First, cost of capital could increase with disclosure quality

when new investment is sufficient elastic. Second, there are plausible conditions under

which disclosure quality reduces the welfare of current and/or new investors. Finally, cost

of capital could move in opposition to the welfare of either current or new investors as

disclosure quality changes.

Wen (2009) examined the determinants and economic efficiency of corporate voluntary

disclosure. The focus was on the trade-off for an individual firm when the benefits and

costs of voluntary disclosure stem from the consequences of its investment decision and

the impact on its share price. Investment and voluntary disclosure decisions are

intertwined. First, voluntary disclosure leads to a more accurate pricing which, in turn,

may improve investment efficiency. Second, the firm may affect the market pricing in its

favor by strategically voluntary disclosure. This opportunistic use of disclosure may cause

the real investment to be distorted at the margin. The analysis showed that efficiency of

voluntary disclosure is influenced by both effects. In addition, the presence of a separate

mandatory accounting report improves the market pricing and may discipline the

voluntary disclosure by limiting the opportunistic behaviour and enhance efficiency.

Adelopo (2010) examined voluntary disclosure practices among listed companies in

Nigeria. Results from Univariate and Multivariate analyses of 52 listed companies,

representing 41 per cent of the population studied, suggested an average voluntary

disclosure of 44 per cent based on modified Meek et al. (1995) disclosure index

comprising 24 disclosure items. The study found significant positive relationship between

voluntary disclosure and firm size, measured as the natural logarithm of total asset.

Significant positive relationship was also found between market based definition of firm

performance and voluntary disclosure. Percentage of block share ownership and

percentage of managerial share ownership were found to be negatively related to firm


56

disclosures. The study has important implications for both individual and institutional

investors globally, regulator and policy makers in developing economies.

Athanasakou and Hussainey (2010) investigated investors’ reliance on forward-looking

performance disclosures that managers provide in the narrative sections of the annual

report. The proxy for these disclosures was an index of statements conveying information

about future performance. They focused on management credibility as a determinant of

disclosure credibility and used earnings quality as a gauge. They argued that forward-

looking disclosures complement the quality of the financial reporting outcome and that

investors use earnings quality to infer the credibility of these disclosures. They found that

forward-looking performance disclosures increase with a firm’s earnings quality. The

abnormal returns associated with these disclosures also increase with a firms’ earnings

quality. Further analysis showed that earnings quality serves as a credibility signal only

when primarily driven by managerial incentives rather than by intrinsic factors from the

firm’s economic environment.

The foregoing review of the existing literature on the subject reveals that while numerous

researchers in India and abroad have made commendable efforts in evaluating the

reporting practices in Annual Reports of companies from various perspectives and view

points; yet no study has been undertaken specifically for banks. Accordingly, the present

study is an attempt to study the disclosure practices of commercial Banks in India. As we

scan through the existing literature on the subject we realize that, despite none of the

studies exactly fit in the framework of this study; yet they do pursue a similar area of

interest, i.e., corporate disclosures and consequently have a significant bearing on the

scope and objectives of the present study.


57

CHAPTER 3 RESEARCH METHODOLOGY

The study has been an attempt to examine and identify major strengths and weaknesses in

disclosure practices of commercial banks in India. This chapter discusses in detail the

research methodology designed to achieve these objectives.

3.1 SAMPLE SELECTION

Sampling frame is a list of all the individual sampling units (elements) in the population.

Sampling frame in this study has been all the scheduled commercial banks of India. A

sampling unit is that element or set of elements considered for selection in some stage of

sampling. Sampling Unit in the study has been any scheduled commercial bank registered

in India and among top banks on the basis of market capitalization.

There were 26 public sector banks operating in india. All these banks were grouped into

five categories based on their total assets . 20 percent from each group were selected.

Table 3.1: Selected Public sector banks with their Total Assets

Assets (in crores)

No. of Banks Name of selected Bank

Rs. Total Selected

up to 210 5 1 Dena Bank (Rs. 207 crores*)

211-290 5 1 Allahabad Bank (Rs. 284 crores*)

291-450 5 1 Corporation Bank (Rs. 331 crores*)

450-800 5 1 Oriental Bank of Commerce (Rs. 511 crores*)

800 above 6 1 Bank of India (Rs. 1161 crores*)

* Figures in brackets show Total assets of the selected banks.

Likewise, there are 21 private sector banks (14 old Banks and 7 new) banks. However,

data of 9 old banks is not available. Twenty percent of banks were selected for detailed


58

analysis. Hence there were 3 old private sector banks and 2 new private sector banks

selected as shown in Table 3.2

Table 3.2: Selected Private sector banks with their Total Assets

Type

No. of Banks Name of selected Bank

Total Data

available

Selected

Old 14 9 3 1. Karur vysya Bank (137.82 cores) 2. South Indian Bank (205.22 crores)

3. Jammu and Kashmir Bank (393.77 crores) New 7 7 2 4. Indusind Bank (371.11 crores)

5. HDFC Bank (2170.65) * Figures in brackets show Total assets of the selected banks.

3.2 DATA COLLECTION Based on the list, each bank’s website was searched through the Google search engine

(www.google.com) in order to obtain copies of its annual report for the financial year

2010-11. For each company, a PDF version of the annual report was downloaded, and in

case of companies who did not have contact details or send hard copies, their PDF annual

reports were printed out for the purpose of analysis. Out of all the commercial banks of

India, the final sample comprised of 10 commercial banks; 5 Public sector banks and 5

private sector banks. The present study is based on secondary data which was obtained

from the published Annual Reports of banks.

3.3 PERIOD OF STUDY The time frame of the study is one financial year i.e. 2010-11. Annual reports of the

selected banks were collected/downloaded from their websites for further analysis.

3.4 DISCLOSURE INDEX The index of disclosure was used in the study to evaluate the annual reports of

commercial banks.

Though disclosure indices have been prepared by a number of previous researchers like

Singhvi and Desai [1971], Baker and Haslem [1973], Buzby [1974-75], Chandra [1975,


59

2001], Barrett [1976], McNally et al [1982], Chow & Wong – Boren [1987], Vasal

[1997], Kohli [1998] etc., but they all have been used to evaluate disclosures in the

Annual Reports of joint stock companies.

The index of disclosure which was used in the present study (Refer Appendix-1) is

different from the previous indices because of the fact that the disclosure requirements of

banking companies are different from non-banking companies. The index of disclosure

used in the present study was framed in the following manner:

After reviewing the items of information included under the indices prepared and used

in previous studies.

After a thorough review of a number of annual reports of banks.

After taking into consideration the relevant provisions of the Reserve Bank of India

Act, 1934 and Banking Regulation Act, 1949.

After giving due consideration to the opinion and advice of experts in the field on what

factors are to be considered and which information items are to be analyzed.

Following the above mentioned path, a total of 348 elements were identified. These

included 161 mandatory disclosure elements and 187 voluntary disclosure elements.

Detailed index of disclosure is available in Appendix-1. Further, these elements were

divided into twenty sub-groups. Number of elements under each category is provided in

the table below.

Table 3.3: Number of Elements under Categories

S.No. Category No. of Items

Mandatory Items

1 Balance Sheet Items 13

2 Profit and Loss Account items 6

3 Board's Report 6

4 Management Discussion and Analysis 9

5 Corporate Governance 46

6 RBI Guidelines 46


60

S.No. Category No. of Items

7 Basel II (Pillar 3) 35

Voluntary Items

8 General corporate information 6

9 Corporate Governance 11

10 Financial performance 37

11 Information relating to key personnel 5

12 Corporate Strategy 19

13 General Risk management 5

14 Key Non- financial statistics 13

15 Employee related information 4

16 Disclosure regarding committees 21

17 Corporate Social disclosure 20

18 Information relating to Borrowers/Shareholders 8

19 Information/Forms for shareholders 12

20 Others 26

Total 348

3.5 TOOLS OF ANALYSIS

A. Level of Disclosure Practices Both a weighted disclosure index and an unweighted disclosure index are usually

used to determine disclosure level. Researchers such as Wallace et al. (1994),

Cooke (1991 and 1992), Karim (1995), Hossain et al (1994), Ahmed and

Nicholls (1994), and Hossain (2000 and 2001), adopted a dichotomous procedure

in which an item scores one if disclosed and zero if not disclosed and this

approach is conventionally termed the unweighted approach. The weighted

disclosure approach (used by for example by Barrett, 1977, and Marston, 1986),

involves the application of weights above zero but less than one to items of

information which are disclosed (zero is the weight for non-disclosure).


61

Previous experiences also show that the use of unweighted and weighted scores

for the items disclosed in the annual reports and accounts can make little or no

difference to the findings (Coombs and Tayib, 1998). Thus, unweighted disclosure

index methodology has been adopted. In this case, the key fact is whether or not a

bank discloses an item of information in the annual report. If a bank discloses an

item of information in its annual report, then ‘1’ is awarded and if the item is not

disclosed, then ‘0’ is awarded. Thus, the unweighted disclosure method measures

the total disclosure (TD) score of a banking company as additive (suggested by

Cooke, 1992) as follows:

Where,

d = 1 if the item is disclosed

= 0 if the item is not disclosed

n = number of items

The fundamental theme of the unweighted disclosure index is that all items of

information in the index are considered equally important to the average user. The

following statistical measures of central value and variation have been applied to

study the disclosure levels in this study:

Arithmetic mean of Disclosure scores

The arithmetic mean is a single value and a measure of central tendency

within the range of data that is used to represent all of the values in the series.

It has been calculated by applying the formula –

NX

Xei

.

valuesofNumbervaluesallofSumMeanArithmetic

Coefficient of Range

Coefficient of range is a relative measure of dispersion corresponding to

ranges and has been obtained by applying the formula –


62

scoredisclosureMinimumscoredisclosureMaximumscoredisclosureMinimumscoredisclosureMaximumrangeoftCoefficien

Standard Deviation

The standard deviation measures in absolute terms variability in the

disclosure score from the mean and has been obtained by applying the

formula –

NXX

2

deviation,Standard

Coefficient of Variation

Coefficient of Variation is a relative measure of dispersion corresponding to

standard deviation and is considered better than standard deviation in

problems where variability of one series of data is required to be compared

against variability in another data series. It has been calculated by applying

the formula –

X.V.C.e.i

DeviationStandardMeanvariationoftCoefficien

A comparison of the results of these statistical techniques over the study period

will help in analyzing if there has been any improvement or deterioration in the

mean levels as well as any increase or decrease in the variation among the

disclosure practices of public sector and private sector banks in their annual

reports.

LIMITATIONS OF THE STUDY

1. The study has covered both mandatory and voluntary disclosures of Indian banks.

Though, mandatory disclosures are supposed to be disclosed by all the banks, yet some of

the mandatory disclosures are made only if applicable. This primarily has been the reason


63

of difference in mandatory disclosure scores of banks. Any variation in total disclosure

score due to this reason has not been ruled out.

2. Finally, this study focused on one avenue of banking disclosure, namely, annual

reports, nd the extent to which banks voluntarily release information through other means

(such as the prospectuses, pamphlets, media and the internet) represent a limitation of this

study. This raises further uncertainty about the extent to which the results can be

generalized in the Indian context.

PLAN OF THE STUDY

The entire study has been divided into six chapters. Chapter 1 includes the introduction

and overview of the concept of corporate disclosures, History of Banking sector in India,

present scenario of Indian banking, importance of disclosures in banking sector,

regulatory framework of disclosure practices of Banks in India, need and scope of the

study, objectives and corresponding hypothesis . Chapter 2 deals with the review of

literature. Chapter 3 covers the research methodology. Chapter 4 provides the analysis of

disclosure performance of selected banks along with the comparative analysis of Public

Sector Banks vs Private Sector Banks and multiple discriminant analysis. Chapter 5

provides element wise analysis of disclosure practices of banks, thus highlighting the

elements which have been disclosed and which have not been disclosed by the banks.

Chapter 6 sums up the entire research study and provides concluding observations.


64

CHAPTER 4

BANK-WISE DISCLOSURES PRACTICES

Enhanced accounting disclosure leads to better transparency and stronger market

discipline in the banking sector. The third pillar of Basel II, Basel Core Principles No.21,

and the Policy Brief released by the OECD “Corporate Governance of Banks” Task

Force, have explicitly asked for better disclosures by banks to allow the market to have a

better picture of the overall risk position of the banks and to allow the counterparties of

the banks to price and deal appropriately. More disclosures should reduce information

asymmetry between those with privileged information and outside small investors, and

facilitate more efficient monitoring, because sufficient information is necessary for

market participants to exert effective disciplinary roles. Enhanced accounting disclosures

should be required for not only publicly-traded banks, but also for privately-held and

state-owned banks, because of the systematic importance of banks in national economy,

their deposit-taking from the general public, and the safety net extended to them financed

by taxpayers. Keeping in mind the importance of banking disclosures, this chapter of the

dissertation has been designed to assess the disclosure levels in case of sample banks

individually and as a group viz. public sector banks and private sector banks. It covers the

data analysis and interprets the results related to bank-wise overall disclosures for

financial year 2010-11. In this chapter, disclosure performance of selected banks has been

analyzed. Besides, a multiple discriminant analysis of disclosure performance of public

and private sector banks has also been carried.

Mandatory Banking Disclosures

DISCLOSURE SCORE ON BALANCE SHEET ITEMS

Table 4.1 depicts the disclosure score of the selected public and private sector banks for

this along with their ranks relating to Balance sheet items for the year 2010-11. Banking

Regulation Act, 1949 requires all the banks to prepare their Balance sheet in a given


65

format and to categorize all the items under specific 13 headings making total disclosure

score 13. Table 4.1 clearly shows that all the banks were making cent per cent disclosure

and that is why the score and rank of all them is 13 and one respectively, being

mandatory.

TABLE 4.1: DISCLOSURE SCORE OF SELECETED BANKS ACCORDING TO BALANCE SHEET ITEMS

(Total items: 13)

SR.

NO. BANKS

DISCLOSURE

SCORE RANK

1 ALLAHABAD BANK 13 1

2 BANK OF INDIA 13 1

3 CORPORATION BANK 13 1

4 DENA BANK 13 1

5

ORIENTAL BANK OF

COMMERCE 13 1

6 HDFC BANK 13 1

7 INDUSIND BANK 13 1

8 J & K BANK 13 1

9 KARUR VYASYA BANK 13 1

10 SOUTH INDIAN BANK 13 1

DISCLOSURE SCORE ON PROFIT & LOSS ACCOUNT ITEMS

Table 4.2 shows the disclosure score of the selected banks relating to Profit and Loss

items and their ranks based on these scores for the selected period of study. Banking

Regulation Act, 1949 requires all the banks to prepare their Profit and Loss Account in a

given format and to categorize all the items under specific 6 headings making total

disclosure score of 6. Further this reveals that all the banks were making cent per cent

disclosure and that is why the score and rank of all them is 6 and one respectively


66

TABLE 4.2: DISCLOSURE SCORE OF SELECETED BANKS ACCORDING TO

PROFIT & LOSS ACCOUNT ITEMS

(Total items: 6) SR.

NO. BANKS

DISCLOSURE

SCORE RANK


2 BANK OF INDIA 6 1


4 DENA BANK 6 1

5

ORIENTAL BANK OF

COMMERCE

6

1

6 HDFC BANK 6 1

7 INDUSIND BANK 6 1

8 J & K BANK 6 1



DISCLOSURE SCORE ON DIRECTOR’S REPORT

Table 4.3 provides information relating to disclosure scores and ranks of the selected

banks relating to the Director’s report for the year 2010-11. This is a mandatory

requirement as per section 217 of the Companies Act, 1956. A total disclosure as per this

report is 6. It is clear from the table that except three banks named Allahabad Bank,

Corporation Bank and J&K Bank, who managed to have eighth position by securing

disclosure score of 5 each, all the other banks were making full disclosure of 6 items and

thereby achieved rank one because they were not supplying information w.r.t. one item

naming Material changes and commitments affecting the financial position of the

company.


67


DIRECTOR’S REPORT


NO. BANKS

DISCLOSURE

SCORE RANK


2 BANK OF INDIA 6 1


4 DENA BANK 6 1

5

ORIENTAL BANK OF

COMMERCE

6

1

6 HDFC BANK 6 1

7 INDUSIND BANK 6 1

8 J & K BANK 5 8



DISCLOSURE SCORE ON MANAGEMENT DISCUSSION AND ANALYSIS

REPORT

Table 4.4 reflects the information relating to Management Discussion and Analysis

Report. One column in the table is allocated to disclosure scores and other column is

awarded for ranks of the banks. Three banks named Dena Bank, HDFC Bank and Karur

Vysya Bank shared the top ranking with 9 score. This is followed by the four banks

named Bank of India, Oriental Bank of Commerce, J&K Bank and South Indian Bank

with a disclosure score of 8. Furthermore, three banks named Allahabad Bank,

Corporation Bank and Indusind Bank are at the bottom of the ladder with a disclosure

score of 7 each as per Management Discussion and Analysis Report.


68


MANAGEMENT DISCUSSION AND ANALYSIS REPORT

(Total items: 9)

SR.

NO. BANKS

DISCLOSURE

SCORE RANK


2 BANK OF INDIA 8 4


4 DENA BANK 9 1

5

ORIENTAL BANK OF

COMMERCE

8

4

6 HDFC BANK 9 1

7 INDUSIND BANK 7 8

8 J & K BANK 8 4



DISCLOSURE SCORE ON CORPORATE GOVERNANCE

Table 4.5 shows the list of selected banks and their respective disclosure scores and ranks

relating to information on Corporate Governance. It is clear from the table that during the

year 2010-11, Allahabad Bank grabbed the first position with the disclosure score of the

44 out of total score of 46. Next in the row is Dena Bank (second rank) with disclosure

score of 42. Followed by this are two banks, namely, Corporation Bank and Indusind

Bank with rank three, disclosure score being 41. Oriental Bank of commerce with the

disclosure score of 40 is at rank five. Further rank six has been shared by J&k Bank,

Karur Vyasya Bank and South Indian Bank with score of 38 each. HDFC Bank has a

disclosure score of 37 and so has been ranked ninth. Finally with disclosure score of 34,

Bank of India stood at tenth position.


69


CORPORATE GOVERNANCE

(Total items: 46)

SR.

NO. BANKS

DISCLOSURE

SCORE RANK




4 DENA BANK 42 2

5

ORIENTAL BANK OF

COMMERCE

40

5

6 HDFC BANK 37 9


8 J & K BANK 38 6



DISCLOSURE SCORE ON RBI GUIDELINES

Table 4.6 reveals the disclosure score and rank of the selected public and private sector

banks relating to RBI GUIDELINES. RBI requires banks to make mandatory disclosure

of 46 items in the ‘Notes to Accounts’. This table clearly shows that Dena Bank and

Karur Vysya Bank with the disclosure score of 44 each have been awarded rank one in

the year. At the third rank is J&K Bank with the disclosure score of 43. All the other

banks namely Allahabad Bank, Bank of India, Corporation Bank, Oriental Bank of

commerce, HDFC Bank, Indusind Bank and South Indian Bank are at fourth position

with the disclosure score of 42 each. Although, information was available in the annual

reports of these companies but not in a proper format.


70


RBI GUIDELINES

(Total items: 46)

SR.

NO. BANKS

DISCLOSURE

SCORE RANK




4 DENA BANK 44 1

5

ORIENTAL BANK OF

COMMERCE

42

4

6 HDFC BANK 42 4


8 J & K BANK 43 3



DISCLOSURE SCORE ON BASEL II (PILLAR 3)

Table 4.7 shows the disclosure performance with ranks of the selected banks in relation to

BASEL II (PILLAR 3) requirements. Disclosure under Pillar 3 of Basel II is mandatory

as per RBI guidelines, which requires maximum of 35 items to be disclosed by banks. All

the banks were making cent per cent disclosure of all the items under this category in the

selected year and that is why all are ranked one.


71


BASEL II (PILLAR3)

(Total items: 35)

SR.

NO. BANKS

DISCLOSURE

SCORE RANK




4 DENA BANK 35 1

5

ORIENTAL BANK OF

COMMERCE

35

1

6 HDFC BANK 35 1


8 J & K BANK 35 1

9 KARUR VYSYA BANK 35 1


Voluntary Banking Disclosures

DISCLOSURE SCORE ON GENERAL CORPORATE INFORMATION

Table 4.8 shows the disclosure score with ranks of the banks selected for study relating to

General corporate information. It is clear from the table that in the year 2010-11, five

banks, namely, Allahabad Bank, Bank of India, Corporation Bank, Dena Bank and South

Indian Bank had disclosed maximum information. All these banks have been ranked one

with the disclosure score of 4 out of total score of 6. Followed by this are Oriental Bank

of commerce, HDFC Bank and Indusind Bank with the disclosure score of 3 and rank six.


72

At ninth rank are two banks namely J&K Bank and Karur Vysya Bank. They managed a

disclosure score of 2 only.


GENERAL CORPORATE INFORMATION


NO. BANKS

DISCLOSURE

SCORE RANK


2 BANK OF INDIA 4 1


4 DENA BANK 4 1

5

ORIENTAL BANK OF

COMMERCE 3 6

6 HDFC BANK 3 6

7 INDUSIND BANK 3 6

8 J & K BANK 2 9




Table 4.9 presents the information relating to Corporate Governance. One column in the

table is allocated to disclosure scores and other column is awarded for ranks of the banks.

The table clearly shows that the in the year selected for study, Dena Bank has highest

disclosure score of 8 out of total score of 11. Hence this bank has placed at first rank.

Corporation Bank and Oriental Bank of Commerce with the disclosure score of 6 each

have been awarded rank two. Next in the row are two banks, namely, Indusind Bank and

J&K Bank who disclosed 5 items each and grabbed fourth position. Rank six has been

secured by two banks, namely, Karur Vysya Bank and South Indian Bank with disclosure


73

score of 4 each. Eighth rank is achieved not only by Bank of India but also by HDFC

Bank making same disclosure score of 3. Last in the list is Allahabad Bank with

disclosure score on 2 only.



(Total items: 11)

SR.

NO. BANKS

DISCLOSURE

SCORE RANK


2 BANK OF INDIA 3 8


4 DENA BANK 8 1

5

ORIENTAL BANK OF

COMMERCE

6

2

6 HDFC BANK 3 8

7 INDUSIND BANK 5 4

8 J & K BANK 5 4



DISCLOSURE SCORE ON FINANCIAL PERFORMANCE

Table 4.10 depicts the information on disclosure score relating to financial performance

of the selected banks and their ranking based on that. In the year 2010-11, Bank of India

is ranked one on the basis of quantum of disclosure. This bank managed to get a

disclosure score of 22 out of total score of 36. This is followed by two banks, Allahabad

Bank and Dena Bank who secured rank two with disclosure score of 19 each. Corporation

Bank, with a disclosure score of 15 is at rank four. Rank five is secured by HDFC Bank

with a disclosure score of 13. Indusind Bank and Karur Vysya Bank shares rank six with


74

a disclosure score of 8 each. Rank eight goes to J & K Bank with a disclosure score of 7.

South Indian Bank has managed ninth rank with a disclosure score of 6. Finally, tenth

rank goes to Oriental Bank of Commerce which disclosed only 4 items out of total of 22

items.


FINANCIAL PERFORMANCE

(Total items: 37)

SR.

NO. BANKS

DISCLOSURE

SCORE RANK




4 DENA BANK 19 2

5

ORIENTAL BANK OF

COMMERCE

4

10

6 HDFC BANK 13 5

7 INDUSIND BANK 8 6

8 J & K BANK 7 8



DISCLOSURE SCORE ON INFORMATION RELATING TO KEY PERSONNEL

INFORMATION

Table 4.11 shows the disclosure performance of selected public and private sector banks

in relation to Key personnel information and their ranking based on that for the year

2010-11. Indusind Bank and South Indian Bank share the top rank with disclosure score

of 4 each out of total score of 5. Rank third is again shared by three banks i.e. Corporation

Bank, Dena Bank and HDFC Bank who managed a disclosure score of 3 each. Bank of


75

India and Karur Vysya Bank with a disclosure score of 2 got rank sixth. Finally,

Allahabad Bank, Oriental Bank of Commerce and J & K Bank has been placed at the

bottom position with a disclosure score of one each.


INFORMATION RELATING TO KEY PERSONNEL

(Total items: 5)

SR.

NO. BANKS

DISCLOSURE

SCORE RANK


2 BANK OF INDIA 2 6


4 DENA BANK 3 3

5

ORIENTAL BANK OF

COMMERCE 1 8

6 HDFC BANK 3 3

7 INDUSIND BANK 4 1

8 J & K BANK 1 8



DISCLOSURE SCORE ON CORPORATE STRATEGY

Table 4.12 provides the disclosure performance of the selected banks relating to corporate

strategy and their score based on that information for the selected year of study i.e. 2010-

11. Rank one is obtained by Oriental Bank of Commerce who secured a disclosure score

of 13 out of total score of 19. Next in the queue is Bank of India at rank two, who got a

score of 11. Allahabad Bank and Corporation Bank with a disclosure score of 10 each are

at rank three. Fifth rank has gone to South Indian Bank who was making nine disclosures.


76

Dena Bank managed the sixth rank by obtaining disclosure score of 8. HDFC Bank

bagged seventh rank by attaining score of 6. Karur Vysya Bank as well as Indusind Bank

achieved eight ranks in the list managing score of 5 each. At tenth rank is J & K Bank. It

only managed to score 4 out of 19.


CORPORATE STRATEGY

(Total items: 19)

SR.

NO. BANKS

DISCLOSURE

SCORE RANK




4 DENA BANK 8 6

5

ORIENTAL BANK OF

COMMERCE

13

1

6 HDFC BANK 6 7

7 INDUSIND BANK 5 8

8 J & K BANK 4 10



DISCLOSURE SCORE ON GENERAL RISK MANAGEMENT

Table 4.13 presents the list of disclosure performance of selected banks relating to

General Risk Management strategy and their rank based on that in relation to selected

year of study. This table clearly depicts that disclosure score of all public and private


77

sector banks was 5 i.e. all the banks were supplying full information on disclosures

related to General Risk management.


GENERAL RISK MANAGEMENT

(Total items: 5)

SR.

NO. BANKS

DISCLOSURE

SCORE RANK


2 BANK OF INDIA 5 1


4 DENA BANK 5 1

5

ORIENTAL BANK OF

COMMERCE

5

1

6 HDFC BANK 5 1

7 INDUSIND BANK 5 1

8 J & K BANK 5 1



DISCLOSURE SCORE ON KEY NON FINANCIAL STATISTICS

Table 4.14 provides with the information relating to Key non financial statistics. First in

the list are Bank of India and Dena Bank. They managed a disclosure score of 8 each out

of the total score of 13 in the year 2010-11. This is followed by both the Corporation

Bank and South Indian Bank who hold third rank by securing a disclosure score of 7

each. Furthermore fifth rank is secured again by two banks i.e. Oriental Bank of


78

Commerce and HDFC Bank with a disclosure score of 6 each. Once more the same rank

is being shared by two banks, as seventh rank is bagged by both J & K Bank and Karur

Vysya Bank, each one of them managed a score of 5. Yet again, in the list are two banks,

Allahabad Bank and Indusind Bank with rank nine and disclosure score of 4 each.


KEY NON FINANCIAL STATISTICS

(Total items: 13)

SR.

NO. BANKS

DISCLOSURE

SCORE RANK


2 BANK OF INDIA 8 1


4 DENA BANK 8 1

5

ORIENTAL BANK OF

COMMERCE

6

5

6 HDFC BANK 6 5

7 INDUSIND BANK 4 9

8 J & K BANK 5 7



DISCLOSURE SCORE ON EMLOYEE RELATED INFORMATION

Table 4.15 provides disclosure performance with ranks of the selected banks in respect of

Employee related information during the year of study. First rank is attained and shared

by two banks, namely, HDFC Bank and Dena Bank. Both these banks managed a score of

Dena Bank and HDFC Bank. Likewise five banks i.e. Allahabad Bank, Corporation

Bank, Indusind Bank, Karur Vysya Bank and South India Bank are awarded rank three as

their disclosure score is 1 each. Bank of India, Oriental Bank of commerce and J & K


79

Bank did not make any disclosure under this category because of this, these are placed at

the end. It implies that these banks are not taking or lacking in the welfare of their

employees – a very unhealthy sign from HRM angle. To improve the efficiency of the

banks, bank management must introduce various incentives/awards for boosting Labour

productivity of the banks.


EMPLOYEE RELATED INFORMATION

(Total items: 4)

SR.

NO. BANKS

DISCLOSURE

SCORE RANK




4 DENA BANK 2 1

5

ORIENTAL BANK OF

COMMERCE

0

10

6 HDFC BANK 2 1

7 INDUSIND BANK 1 3

8 J & K BANK 0 10



DISCLOSURE SCORE ON DISCLOSURE REGARDING COMMITTEES

Table 4.16 deals with disclosure score of information relating to committees along with

ranks of the respective banks during the year 2010-11. Indusind Bank bagged first rank

with a disclosure score of 11 out of total score of 21 in this series. Next in the list are

Dena Bank and Allahabad Bank who competed with each other for the same rank. Both

secured second rank with disclosure score of 10 each. However fourth rank faced a severe

competition as three banks i.e. Corporation Bank , Oriental Bank of commerce and J & K


80

Bank grabbed this rank with the score of 9 each. South Indian Bank is placed at seventh

rank in this list with the score of 8. In addition to that HDFC Bank is at ninth rank and

Bank of India is at tenth rank having disclosure score of 5 and 1 respectively.


DISCLOSURE REGARDING COMMITTEES

(Total items: 21)

SR.

NO. BANKS

DISCLOSURE

SCORE RANK




4 DENA BANK 10 2

5

ORIENTAL BANK OF

COMMERCE

9

4

6 HDFC BANK 5 9


8 J & K BANK 9 4



DISCLOSURE SCORE ON CORPORATE SOCIAL DISCLOSURE

Table 4.17 provides disclosure performance with ranks of the selected banks in relation to

corporate social disclosures. Top rank is being scored by Allahabad Bank by disclosing

11 out of the total 20 items. Bank of India and Dena Bank grabbed second position in the

table as both disclosed 10 items each. Moreover Oriental Bank of commerce and HDFC

Bank secured fourth position as both of them provided the information on 7 items. Karur

Vyasya Bank managed sixth rank and South Indian Bank got seventh rank as they


81

received a score 6 and 5 respectively. The Corporation Bank and J&K Bank competed for

eighth rank as both of them disclosed 4 items. Last rank is scored by Indusind Bank, who

disclosed merely 3 items. The discussion reveals that, most of the banks drawing their

fields from CSR function which is not a healthy sign for banking development.


CORPORATE SOCIAL DISCLOSURE

(Total items: 20)

SR.

NO. BANKS

DISCLOSURE

SCORE RANK




4 DENA BANK 10 2

5

ORIENTAL BANK OF

COMMERCE

7

4

6 HDFC BANK 7 4


8 J & K BANK 4 8



DISCLOSURE SCORE ON INFORMATION REGARDING

BORROWERS/DEPOSITORS

Table 4.18 reflects the disclosure score and ranks of the banks relating to attain any

information regarding Borrowers/ Depositors in the year 2010-11. Dena bank has not

been attained any rank as it did not disclose any information under this head. With the


82

exception of J&K Bank, which has disclosed 7 items and attained rank nine, all the other

banks have made full disclosure of all the 8 items and there by grabbed the top position.


INFORMATION REGARDING BORROWERS/DEPOSITORS

(Total items: 8)

SR.

NO. BANKS

DISCLOSURE

SCORE RANK


2 BANK OF INDIA 8 1


4 DENA BANK 0 10

5

ORIENTAL BANK OF

COMMERCE

8

1

6 HDFC BANK 8 1

7 INDUSIND BANK 8 1

8 J & K BANK 7 9



DISCLOSURE SCORE ON INFORMATION/FORMS FOR SHAREHOLDRES

Table 4.19 deals with disclosure performance along with the ranks of the selected banks

in relation to Information/Forms for shareholders for the selected year of study. Total

disclosure score under this Table is 12 and J&K Bank has been ranked one as it provided

maximum information/forms for shareholders. It attained disclosure score of 8. This is

followed by five banks named Allahabad Bank, Bank of India, Oriental Bank of

commerce, Indusind Bank and South Indian Bank; all these having a disclosure score of 7


83

and sharing rank two. Next rank being seventh rank is bagged by HDFC Bank as it

disclosed 6 items under this heading. Corporation Bank has a disclosure score of 4 and so

has been ranked nine. Finally Karur Vyasya Bank has been ranked tenth. This bank had

made least disclosure of only two items under this head.


INFORMATION/FORMS FOR SHAREHOLDERS


NO. BANKS

DISCLOSURE

SCORE RANK


2 BANK OF INDIA 7 2


4 DENA BANK 5 8

5

ORIENTAL BANK OF

COMMERCE

7

2

6 HDFC BANK 6 7

7 INDUSIND BANK 7 2

8 J & K BANK 8 1



DISCLOSURE SCORE ON MISCELLANEOUS INFORMATION

Table 4.20 provides disclosure performance with ranks of the selected banks in relation to

Miscellaneous information. Any information which cannot be put in the above mentioned

categories has been put in this category of miscellaneous information. Twenty six such

elements have been identified. These include Information on Chairman’s/MD’s report,

ISO 9001: 2000 certification, Graphical presentation of performance indicators,

Performance at a glance-3 year, Review of other products and services, Publications,


84

Bilingual Report, Benchmark prime lending rate (BPLR), Macro Economic scenario,

Disclosure regarding Movement of interest rates, Domestic economic scenario, Progress

under different plans, Restructuring of debt, Asset quality and NPA management,

Recovery under SARFAESI Act 2002, Visit of parliamentary committee, Government

business, IT initiatives, Strategic investment, Credit rating, Accounts under US GAAP,

Information on Industrial relations, Promoting financial awareness, Conscious corporate

citizen, Bullion Banking/precious metal business, Loan review mechanism and Bullion

Banking/precious metal business

The table clearly shows that Dena Bank with disclosure score of 17 has secured

rank one. At the second rank is Bank of India with a disclosure score of 16. Third rank

has been awarded to Corporation Bank which managed a disclosure score of 14. Next in

the row J&K Bank with fourth rank and disclosure score of 12. South India Bank with a

disclosure score of 11 is at rank five. Rank six has been shared by two banks named

Allahabad Bank and Karur Vysya Bank. Both these banks attained a score of 10 each.

With a disclosure score of 9, Indusind Bank stood at eighth position. HDFC Bank

grabbed position of nine giving disclosure of seven items. Last rank is allotted to Oriental

Bank of commerce as it did not disclose any items under this head.


MISCELLANEOUS INFORMATION

(Total items: 26)

SR.

NO. BANKS

DISCLOSURE

SCORE RANK




4 DENA BANK 17 1

5

ORIENTAL BANK OF

COMMERCE 0 10

6 HDFC BANK 7 9

7 INDUSIND BANK 9 8

8 J & K BANK 12 4


85

SR.

NO. BANKS

DISCLOSURE

SCORE RANK

9 KARUR VYSYA BANK 10 6


DISCLOSURE SCORE ON MANDATORY ITEMS

Table 4.21 provide with the information on all the mandatory requirements disclosed by

the banks. One column in the table is allocated to disclosure scores and other column is

awarded for ranks of the banks. Maximum mandatory disclosures under this head are 161

items. The top most position is achieved by Dena bank which has disclosed the

maximum information of 155 items. Whereas Bank of India has been given the lowest

rank i.e. tenth rank, which provided the least information of merely 144 items. Second

rank being grabbed by Allahabad Bank who disclosed 152 items. Karur Vysya Bank is

right behind Allahabad Bank at third rank with 151 disclosures.


MANDATORY DISCLOSURES


NO. BANKS

DISCLOSURE

SCORE RANK

1 ALL AHABAD BANK 152 2



4 DENA BANK 155 1

5

ORIENTAL BANK OF

COMMERCE

150

4

6 HDFC BANK 148 7



86

8 J & K BANK 148 7



scores. Chasing Karur Vysya Bank is ORIENTAL BANK OF COMMERCE and

INDUSIND BANK, both at fourth ranks with same 150 disclosure scores. Furthermore

Corporation Bank with 149 disclosure scores attained sixth rank. Next to it are three

banks, namely, HDFC Bank, J&K Bank and South Indian Bank, all are at seventh rank

having disclosure score of 148. From the above disclosure it was clear that private sector

banks are lacking behind the public sector banks in respect of mandatory disclosures. The

imperative of the hour is to adopt strict regulatory measures for healthy Banking

development.

DISCLOSURE SCORE ON VOLUNTARY ITEMS

Table 4.22 depicts the information related to the information disclosed by banks on their

own. It means that Banks have disclosed this information voluntarily. There are

maximum of 187


VOLUNTARY DISCLOSURES


NO. BANKS

DISCLOSURE

SCORE RANK




4 DENA BANK 99 1

5

ORIENTAL BANK OF

COMMERCE

82

5


87

6 HDFC BANK 74 7


8 J & K BANK 69 9



disclosures being provided by various banks. Dena Bank has grabbed first rank by

disclosing maximum number of 99 items out of 187 total disclosures. Bank of India has

achieved second rank and has missed the first rank by only two items as it disclosed 97

items. However Allahabad Bank has achieved third and fourth rank is attained by

Corporation Bank with having the disclosure score of 92 and 90 respectively. Oriental

Bank of commerce managed to have fifth rank by disclosing 82 items. Moreover South

Indian Bank holds sixth rank in this table by getting disclosure score of 79.HDFC Bank

got seventh rank, Indusind Bank managed eighth rank and J&K Bank survived to get

ninth rank with the disclosure scores of 74, 73 and 69 respectively. Whereas, Karur

Vysya Bank has disclosed least information of only 64 items and have been awarded the

lowest rank.

DISCLOSURE SCORE ON TOTAL ITEMS

Table 4.23 is the sum total of all the mandatory and voluntary disclosures given by the

banks. The total of both mandatory and voluntary disclosures is 348. Dena Bank by

disclosing maximum number of 255 items has grabbed the top most position. Second

position is attained by Allahabad Bank as it lacked behind by 10 items as their disclosure

score is 245. In addition to Bank of India by disclosing 242 items achieved third rank and

Corporation Bank managed fourth rank as it disclosed 240 items. Fifth rank being

awarded to Oriental Bank of Commerce for its disclosure score of 233. South Indian

Bank has taken sixth rank and seventh rank is obtained by Indusind Bank as they have a


88

disclosure score of 228 and 224 respectively. Eighth rank is acquired by HDFC Bank by

scoring 223. J & K Bank and Karur Vysya Bank have reached ninth and tenth position

respectively. Both have gained 218 and 216 marks correspondingly.


TOTAL DISCLOSURES


NO. BANKS

DISCLOSURE

SCORE RANK




4 DENA BANK 255 1

5

ORIENTAL BANK OF

COMMERCE

233

5

6 HDFC BANK 223 8


8 J & K BANK 218 9



COMPARISON OF PUBLIC AND PRIVATE SECTOR BANKS


89

In this section an attempt is made to compare the disclosure system of public sector banks

with that of private sector banks. Estimated Mean values of disclosure score is reported in

Table 4.24

Average Disclosure score of public sector banks was estimated at 243 as compared to 222

of private sector banks. The difference between the two means is significantly different.

Mean disclosure score of different banks were also examined for different type of

disclosure. There were no difference in the average score under mandatory disclosure, the

average score being 149 and 150 respectively for private and public sector banks.

However, there were significant differences in the average disclosure score under

voluntary category. The average disclosure score was 92 for public sector banks as

compared to 72 for private sector banks. To confirm these, ANOVA was run and the

resulting (Table 4.25) estimates confirmed significant difference of Total disclosure score

as well as voluntary disclosure score.

Table 4.24 : Mean and Standard Deviation of Disclosure Score

N Mean Std. Deviation Total Public Sector Banks 5 243.00 8.031

Private Sector Banks 5 221.80 4.817 Total 10 232.40 12.799

Voluntary Public Sector Banks 5 92.00 6.671 Private Sector Banks 5 71.80 5.630

Total 10 81.90 12.133 Mandatory Public Sector Banks 5 150.00 4.062

Private Sector Banks 5 149.00 1.414 Total 10 149.50 2.915

Table 4.25 Resulting Estimates of ANOVA of Disclosure Score

Sum of Squares df

Mean Square F Sig.

Total Between Groups 1123.600 1 1123.600 25.624 .001 Within Groups 350.800 8 43.850 Total 1474.400 9

Voluntary Between Groups 1020.100 1 1020.100 26.774 .001 Within Groups 304.800 8 38.100 Total 1324.900 9

Mandatory Between Groups 2.500 1 2.500 .270 .617 Within Groups 74.000 8 9.250


90

Table 4.25 Resulting Estimates of ANOVA of Disclosure Score

Sum of Squares df

Mean Square F Sig.

Total Between Groups 1123.600 1 1123.600 25.624 .001 Within Groups 350.800 8 43.850 Total 1474.400 9

Voluntary Between Groups 1020.100 1 1020.100 26.774 .001 Within Groups 304.800 8 38.100 Total 1324.900 9

Mandatory Between Groups 2.500 1 2.500 .270 .617 Within Groups 74.000 8 9.250 Total 76.500 9

Further, to supplement these results, Discriminant analysis has been used to identify

which of the disclosure (s) financial attributes/ratios have the maximum discriminatory

power to explain the variation among public sector banks and private sector banks in

india. Also, the analysis has a purpose to examine the magnitude of variation caused by

Discriminant functions. Towards the end, the objective has been to examine and compare

the group membership on the basis of ownership and on the basis of prior probabilities

calculated by Discriminant analysis. In this analysis, ownership based grouping has been

the dependent variable. Independent variables have been the total, mandatory and

voluntary disclosure scores of public and private sector banks.

Mentioned below is the information related to Discriminant functions. As there were two

groups, number of functions have been two minus one i.e. one. Table below provides

information related to Eigen values of Discriminant functions. These are the Eigen values

of the matrix product of the inverse of the within-group sums-of-squares and cross-

product matrix and the between-groups sums-of-squares and cross-product matrix. These

Eigen values are related to the canonical correlations and describe how much

discriminating ability a function possesses. The magnitudes of the Eigen values are

indicative of the functions' discriminating abilities.

Canonical correlation has been recorded at 0.877. Thus, coefficient of determination

comes out to be 0.769. This indicates that Discriminant function has managed to explain


91

almost 77 percent of the variation. The total variation explained by this function shows

that this is significant function with high Eigen value of 3.347 and is causing cent per cent

variation.

Table 4.26: Eigen Values

Function Eigenvalue % of Variance Cumulative % Canonical Correlation 1 3.347a 100.0 100.0 .877 a. First 1 canonical discriminant functions were used in the analysis. Wilks’ lambda indicates the significance of the Discriminant function. Table indicates a

highly significant function (p = 0.001) and provides the proportion of total variability not

explained, i.e. it is the converse of the squared canonical correlation. Therefore, this

function has unexplained variation up to approximately 23 percent only. Value of chi-

square is 11.021, which is significant at 5% level of significance.

Table 4.27: Wilks' Lambda

Test of Function(s) Wilks' Lambda Chi-square df Sig. 1 .230 11.021 1 .001

Standardized Canonical Discriminant Function Coefficients was also used to calculate the

Discriminant score for a given case. The score is calculated in the same manner as a

predicted value from a linear regression, using the standardized coefficients and the

standardized variables. VOL(Voluntary disclosure ) is the variable created by

standardizing our discriminating variables. The distribution of the score this function is

standardized to have a mean of zero and standard deviation of one.


92

A further way of interpreting Discriminant analysis results is to describe each group in

terms of its profile, using the group means of the predictor variables. These are the

means of the Discriminant function scores by group for each function calculated. These

group means are called centroids. These are displayed in the Group Centroids table. In

case of this function , Public sector banks have a mean of 1.636 and private sector banks

have -1.636. Cases with scores near to a centroid are predicted as belonging to that

group. These values indicate that public sector banks have greater degree of disclosure

as compared with private sector banks.

Table 4.28: Functions at Group Centroids

Category Function

1 Public Sector Banks 1.636 Private Sector Banks -1.636 Unstandardized canonical discriminant functions evaluated at group means

Finally, there is the classification phase. The classification table, also called a confusion

table, is simply a table in which the rows are the observed categories of the dependent and

the columns are the predicted categories. When prediction is perfect all cases will lie on

the diagonal. The percentage of cases on the diagonal is the percentage of correct

classifications. The cross validated set of data is a more honest presentation of the power

of the Discriminant function than that provided by the original classifications and often

produces a poorer outcome. The cross validation is often termed a ‘jack-knife’

classification, in that it successively classifies all cases but one to develop a Discriminant

function and then categorizes the case that was left out. This process is repeated with each

case left out in turn. This cross validation produces a more reliable function. The

argument behind it is that one should not use the case you are trying to predict as part of

the categorization process.

Table presents a summary of classification of both categories of banks in matrix form

based on their original classification and their classification based on prior probabilities of

Discriminant analysis. It is clear that all the cases have been correctly classified.


93

Table 4.29: Classification Resultsa

Category

Predicted Group Membership

Total Public Sector

Banks Private Sector

Banks Original Count Public Sector Banks 5 0 5

Private Sector Banks 0 5 5 % Public Sector Banks 100.0 .0 100.0

Private Sector Banks 0 100.0 100.0 a. 100.0% of original grouped cases correctly classified. Thus it can be said that voluntary disclosure score has played the role of perfect

discriminator between public sector and private sector banks. Also the voluntary

disclosure score of public sector banks has been significantly higher than that of private

sector banks.

CHAPTER 5

ITEM-WISE ANALYSIS OF BANKING DISCLOSURES

Accounting disclosure is raised to a particularly high level of importance for banking

organizations compared to non-financial firms, for banks are inherently more opaque.

Accounting reports are almost the sole source of information for bank investors and other

stakeholders. Banks own few physical and visible assets, and investors can acquire a

sense of a bank’s performance and asset quality only from accounting numbers. Earnings


94

numbers alone are not adequate for assessing the valuation of banks, the main business of

which is to take risks and to provide liquidity (and thus earnings can be inflated through

doing more of them). Thus profitability does not give investors the whole picture of the

bank’s financial situation, until risk profile of the bank is holistically disclosed. Finally,

aggregate accounting numbers (e.g., total profits, total loans) without reasonable level of

breakdown is less informative for banks than it is for industrial firms, because the most

important information usually lies in the details of the sources of income and expenses, or

quality of assets. Investors need this information to make judgments on which incomes

are sustainable and which expenses are recurring. Following this theme of importance of

disclosure of various accounting elements this chapter has been designed and provided

with the element wise analysis of disclosure practice of selected banks. Main purpose of

this chapter is to highlight elements which have been disclosed by all the banks and those

which have not been disclosed at all by any bank. Besides, growth in disclosures of such

elements over the period of study has also been examined. In total 348 elements under 20

categories have been covered in analysis. To analyze element wise disclosures, simple

frequencies and percentages have been used.

MANDATORY BANKING DISCLOSURES

There have been 161 elements identified as mandatory disclosures under banking

regulatory framework. These elements have been divided in seven broad categories and

analyzed. Disclosure percentage has been calculated on the basis of maximum possible

disclosure, i.e. if all the banks disclose the element in annual reports. Results of

disclosures of each element under specified categories are as below.

DISCLOSURE SCORE ON BALANCE SHEET ITEMS

First category of mandatory disclosures is Balance Sheet items. This category has thirteen

items in total. These items include Capital and its breakdown, Reserve and surplus and

their breakdown, Deposits and its breakdown, Borrowings and its breakdown, Other

liabilities and provisions and their breakdown, Cash and Balance with RBI and their

breakdown, Balances with other banks and their breakdown, Money at call and short

notice, Investments and its breakdown, Advances and its breakdown, Fixed assets and


95

their breakdown, Other Assets and their breakdown, Contingent Liabilities and their

breakdown, Bills for Collection.

TABLE 5.1: BALANCE SHEET ITEMS

No. of Disclosures percentage of

Disclosures Sr. No. Balance Sheet items Public Private Total Public Private Total

1 Capital and its breakdown 5 5 10 100 100 100 2

Reserves and Surplus and their breakdown 5 5 10 100 100 100

3 Deposits and its breakdown 5 5 10 100 100 100 4 Borrowings and its breakdown 5 5 10 100 100 100 5

Other liabilities and provisions and their breakdown 5 5 10 100 100 100

6

Cash in hand and balance with RBI and their breakdown 5 5 10 100 100 100

7

Balance with other banks and Money at call and short notice 5 5 10 100 100 100

8 Investments and its breakdown 5 5 10 100 100 100 9 Advances and their breakdown 5 5 10 100 100 100

10 Fixed Assets and their breakdown 5 5 10 100 100 100 11 Other assets and their breakdown 5 5 10 100 100 100

12 Contingent liabilities their breakdown 5 5 10 100 100 100

13 Bills for collection 5 5 10 100 100 100 Table 5.1 shows that all these items have been disclosed by all the selected public and

private sector banks during year 2010-11. Hence, the disclosure percentage is 100 in this

category. Similar results also holds true in respect of private as well as public sector

banks.

DISCLOSURE SCORE ON PROFIT & LOSS ACCOUNT ITEMS

Second category deals with Profit & Loss account items. There are six items in total in

this category. These items include Interest earned and their breakdown, Other Income and

its breakdown, Interest expenses and its breakdown, Operating expenses and its

breakdown, Net Profit / Loss and Appropriations.

TABLE 5.2: PROFIT & LOSS ACCOUNT ITEMS

No. of Banks Percentage of Disclosures


96

Profit and Loss Account items Public Private Total Public Private Total 1

Interest earned and their breakdown 5 5 10 100 100 100

2 Other income and its breakdown 5 5 10 100 100 100 3

Interest expended and its breakdown 5 5 10 100 100 100

4

Operating expenses and its breakdown 5 5 10 100 100 100

5 Net Profit/Loss for the year 5 5 10 100 100 100 6 Appropriations 5 5 10 100 100 100

Table 5.2 shows the information related to disclosures of various profit & loss account

elements. Again in this category, all the items have been disclosed by all the selected

public and private sector banks in the selected year of study. Hence, the category

disclosure is 100.

DISCLOSURE SCORE ON DIRECTOR’S REPORT

Third category deals with Board’s Report. This category has six elements named

Directors Report, Narrative statement of company's affair, Amount of dividend

recommended, Narrative discussion of material changes and commitments, Narrative

discussion of any changes occurring during the year and Directors responsibility

statement.

TABLE 5.3: DIRECTOR’S REPORT


DIRECTOR'S REPORT Public Private Total Public Private Total 1 Director’s report 5 5 10 100 100 100 2 Statement of company’s affairs 5 5 10 100 100 100

3 Amount proposed to carry to any reserve 5 5 10 100 100 100

4

Amount recommended to be paid by way of dividend 5 5 10 100 100 100

5

Material changes and commitments affecting the financial position of the company 3 4 7 60 80 70

6 Director's Responsibility Statement 5 5 10 100 100 100


97

As per Table 5.3, except one item named Material changes and commitments affecting

the financial position of the company in which disclosure performance of public sector

banks is slightly low than private sector banks as this information is disclosed by 3 public

sector banks in comparison to 4 private sector banks disclosing this information. This

may be because of two reasons , either no material change has occurred in the bank’s

financial position or banks are voluntary hiding this information. All other items have

been fully disclosed by both the categories of the banks during the year 2010-11. Hence,

the disclosure of all these five elements is 100 by both public sector and private sector

banks.

DISCLOSURE SCORE ON MANAGEMENT DISCUSSION AND ANALYSIS

REPORT

This category has nine elements of disclosures. These elements are Report on

management discussion and Analysis, Disclosure of narrative discussion on industry

structure and development, Narrative discussion of opportunities and threats, Disclosure

of performance on segment or product wise, Narrative discussion of outlook, Discussion

of information regarding risks and concerns, Disclosure of information on internal control

system and adequacies, Discussion of financial performance with respect to operational

performance and Discussion of material development in HR including number of people

employed.

TABLE 5.4: MANAGEMENT DISCUSSION AND ANALYSIS REPORT


MANAGEMENT DISCUSSION AND ANALYSIS REPORT Public Private Total Public Private Total

1

Report on Management Discussion and Analysis 5 5 10 100 100 100

2

Disclosure regarding industry structure and developments 5 5 10 100 100 100

3

Disclosure regarding opportunities and threats 4 4 8 80 80 80

4

Disclosure regarding segment wise or product wise performance 3 4 7 60 80 70

5 Disclosure regarding Outlook 5 4 9 100 80 90


98

6 Disclosure regarding Risks and concerns 5 5 10 100 100 100 7

Disclosure regarding Internal control systems and their adequacy 2 4 6 40 80 60

8

Disclosure regarding discussions on financial performance vis-à-vis operational performance 5 5 10 100 100 100

9

Disclosure regarding material development in human resource including number of people employed 5 5 10 100 100 100

Table 5.4 clearly shows that disclosure regarding Internal control system and their

adequacy is low in case of public sector bank as only two out of five public sector banks

are disclosing this information. But in case of private sector banks disclosure of this item

is quite high as it is disclosed by four out of five banks, total disclosure however is

average. The reason for poor disclosure by public sector banks can be that they do not

have internal control system or it is not working effectively. Disclosure regarding

segment wise or product wise performance and Disclosure regarding opportunities and

threats is quite high by both the selected public and private sector banks. However

disclosure regarding Outlook is very high by both the category of Banks with slightly low

performance on the part of private sector banks. Apart from this remaining 5 items are

being disclosed fully by all the selected public and private sector banks. These items are

Report on Management Discussion and Analysis, Disclosure regarding industry structure

and developments, Disclosure regarding Risks and concerns, Disclosure regarding

discussions on financial performance vis-à-vis operational performance and Disclosure

regarding material development in human resource including number of people

employed.


Some of the elements of corporate governance have been mandatory while the others

voluntary by nature. This section deals with the elements which are mandatory to be

disclosed. This category has 46 elements in total. These elements are Brief statement of

company on corporate governance, Composition of Board of Directors, Category of

Directors, Details of attendance of each director at BOD meetings, Number of BOD

meetings held, Dates of BOD meetings, Number of other BOD's or Board committees in

which he is a member or chairperson, Brief description of terms of reference of audit

committee, Composition, name of members and chairperson of audit committee,

Meetings and attendance during the year of audit committee, Brief description of terms of


99

reference of remuneration committee, Composition, name of members and chairperson of

remuneration committee, Attendance during the year of remuneration committee,

Remuneration policy, Details of remuneration to all the directors, Information on

Management committee, Name of non-executive director heading the shareholder

committee, Name and designation of compliance officer, Number of shareholders

complaints received so far, Number not solved to the satisfaction of shareholders,

Number of pending complaints, Location and time, where last three AGM's held,

Disclosure of any special resolution passed in the previous three AGM's, Details of voting

pattern, Details of persons conducting postal ballot, Disclosure of materially significant

related party transactions, Disclosure of accounting treatment, Details of non-compliance

penalties imposed by stock exchange or SEBI, Information on half-yearly report sent to

each household of shareholders, Information on the quarterly result / press release to

website, Information on presentations made to institutional investors / analysts,

Disclosure of current AGM, date, time and venue, Disclosure of financial calendar, Date

of book closure, Dividend payment date, Listing information on stock exchanges,

Disclosure of stock code, Market price data, Disclosure of performance, Disclosure of

registrar and transfer agents, Information on the share transfer system, Information on

distribution of shareholders category wise, Information of shareholding pattern,

Dematerialization of shares, Profile of directors appointed during the year and Auditors

certificate on compliance with condition of corporate governance.

Table 5.5 shows that disclosure regarding Disclosures relating to penalties imposed by

SEBI, Dematerialization of shares and liquidity, Number of complaints not solved to the

satisfaction of shareholders, Number of shareholders’ complaints received so far, Name

and designation of compliance officer and Number of board meetings held with date is

better in case of Public sector banks, whereas disclosure regarding the items naming

Composition of remuneration committee, Name of members and chairperson of

remuneration committees, Attendance in the meetings of remuneration committee and

Newspapers wherein results normally published is much better in case of Public sector

banks as these items are being disclosed by almost all the public sector banks with only 2

or 3 private sector banks disclosing this information. Position is reverse in case of few

items, where disclosure performance of public sector banks is poor in comparison to

private sector banks.

TABLE 5.5: CORPORATE GOVERNANCE


100

No. of banks Percentage of

Disclosures CORPORATE GOVERNANCE Public Private Total Public Private Total 1

Brief statement of companies on corporate governance 5 5 10 100 100 100

2 Composition of Board of directors 5 5 10 100 100 100 3 Category of Board of directors 5 5 10 100 100 100

4 Attendance of directors at board meetings 4 5 9 80 100 90

5 Attendance of directors at last AGM 4 5 9 80 100 90 6

Number of other boards in which the director is member or chairperson 5 5 10 100 100 100

7 Number of board meetings held with date 5 4 9 100 80 90

8 Composition of audit committee 5 5 10 100 100 100 9

Name of members and chairperson of audit committee 5 5 10 100 100 100

10 Meetings and attendance during the year 5 5 10 100 100 100

11 Composition of remuneration committee 5 2 7 100 40 70

12

Name of members and chairperson of remuneration committees 5 2 7 100 40 70

13

Attendance in the meetings of remuneration committee 4 2 6 80 40 60

14 Remuneration policy 5 5 10 100 100 100 15

Details of remuneration to all directors as per format 2 2 4 40 40 40

16

Name of non executive director heading the shareholders committee 5 5 10 100 100 100

17

Name and designation of compliance officer 4 3 7 80 60 70

18

Number of shareholders’ complaints received so far 5 4 9 100 80 90

19

Number of complaints not solved to the satisfaction of shareholders 5 4 9 100 80 90

20 Number of pending complaints 5 5 10 100 100 100 21 Location and time of last three AGMs 5 5 10 100 100 100 22

Disclosure regarding special resolution passed in previous 3 AGMs 3 5 8 60 100 80

23

Disclosure regarding special resolution passed last year through postal ballot-details of voting pattern. 4 5 9 80 100 90

24

Person who conducted the postal ballot exercise 4 4 8 80 80 80

25

Whether any special resolution is proposed to be conducted through postal ballot 4 4 8 80 80 80


101


Disclosures CORPORATE GOVERNANCE Public Private Total Public Private Total

26 Procedure for postal ballot 0 0 0 0 0 0 27

Disclosures relating to related party transactions 4 4 8 80 80 80

28

Disclosures relating to non compliance by the Company (SEBI guidelines) 2 2 4 40 40 40

29

Disclosures relating to penalties imposed by SEBI 4 3 7 80 60 70

30 Whistle blower policy 3 5 8 60 100 80 31 Quarterly results 5 5 10 100 100 100 32

Newspapers wherein results normally published 4 2 6 80 40 60

33 Information relating to website 5 5 10 100 100 100 34 Time, date and venue of AGM 5 5 10 100 100 100 35 Date of book closure 5 5 10 100 100 100 36 Dividend payment date 5 5 10 100 100 100 37 Listing of stock exchanges 5 5 10 100 100 100 38 Stock code 5 5 10 100 100 100 39 Market price data 5 5 10 100 100 100 40 Registrar and Transfer Agents 5 5 10 100 100 100 41 Share Transfer System 5 5 10 100 100 100 42 Distribution of shareholding 5 5 10 100 100 100

43 Dematerialization of shares and liquidity 5 4 9 100 80 90

44

Outstanding GDRs/ADRs/Warrants or any Convertible instruments, conversion date and likely impact on equity 2 2 4 40 40 40

45 Address for correspondence 5 5 10 100 100 100

46 Auditor’s certificate on corporate governance 4 4 8 80 80 80

These items are Attendance of directors at board meetings, Attendance of directors at last

AGM, Disclosure regarding special resolution passed in previous three AGMs, Disclosure

regarding special resolution passed last year through postal ballot-details of voting pattern

and Whistle blower policy. There is one item, naming Procedure for postal ballot, which

remained undisclosed by all the selected Public and Private sector banks. Furthermore in

case of few items, there is no difference between the disclosure practices of the public and

private sector banks although the disclosure level is very low. These items are Details of

remuneration to all directors as per format, Disclosures relating to non compliance by the

Company (SEBI guidelines) and Outstanding GDRs/ADRs/Warrants or any Convertible


102

instruments and conversion date and likely impact on equity. All the remaining items are

equally and highly disclosed by both categories of selected banks.

DISCLOSURE SCORE ON RBI GUIDELINES

Reserve Bank of India (RBI) has issued comprehensive guidelines related to banking

disclosures in annual reports. Information elements based on RBI guidelines are 46 in

number. These include Capital Adequacy ratio - Tier I & Tier II capital, Percentage of

shareholding of the Govt. of India in the nationalized banks, Amount of subordinated debt

raised as Tier II capital, Gross Value of investments, Provisions made towards

depreciation in the value of investments, Movement of provisions held towards

depreciation on investments, Repo transactions, Non-SLR investment portfolio, Forward

rate agreement / interest rate swap, Exchange traded interest rate derivatives, Disclosure

on risk exposure in derivatives, Percentage of net NPA's to net advances, Movement in

NPA's, Amount of provisions made towards NPA's, Movement of provisions held

towards NPA's, Details of loan assets subjected to restructuring, Details of financial

assets sold to an SC/RC for asset reconstruction, Details of non-performing assets

purchased / sold, Provision on standard assets, Interest income as a percentage to working

funds, Non-interest income as a percentage to working funds, Operating Profit as a

percentage to working funds, Return on assets, Business (deposits plus advances) per

employee, Profit per employee, Foreign currency assets and liabilities, Exposure to real

estate sector, Exposure to capital market, Exposure to country risk, Details of single

borrower / group borrower limit exceeded by the bank, Provisions made towards Income

tax during the year, Disclosure of penalties imposed by RBI, AS 17 -Segment Reporting,

AS 18 - Related Party Disclosures, AS20 - Earnings per share, AS 21 – Consolidated

Financial Statements, AS 22 - Accounting for Taxes on Income, Other Accounting

Standards, Provisions and contingencies, Disclosure of complaints, Disclosure of letter of

comforts issued by banks, Revenue Recognition, Staff Benefits and Cash Flow

statement.

TABLE 5.6: RBI GUIDELINES


Disclosures RBI GUIDELINES Public Private Total Public Private Total

1

Details relating to capital adequacy ratio (Tier I and Tier II capital) 5 5 10 100 100 100

2 Percentage shareholding by Govt. of 5 4 9 100 80 90


103


Disclosures RBI GUIDELINES Public Private Total Public Private Total India in nationalized banks

3 Amount raised by issue of IPDI 4 3 7 80 60 70

4 Amount raised by issue of upper Tier II instruments 5 5 10 100 100 100

5

Gross and net value of investments held by bank in India and outside India 5 5 10 100 100 100

6 Securities sold under repo 5 5 10 100 100 100 7 Securities purchased under reverse repo 5 5 10 100 100 100 8 Details regarding non SLR investment 5 5 10 100 100 100 9 Forward rate agreement 4 5 9 80 100 90

10 Exchange traded interest rate derivatives 4 5 9 80 100 90

11

Disclosure relating to risk exposure in derivatives 5 5 10 100 100 100

12 Percentage of net NPAs to Net advances 5 5 10 100 100 100 13 Movement of NPAs 5 5 10 100 100 100 14 Movement of provisions for NPAs 5 5 10 100 100 100 15 Particulars of accounts restructured 5 5 10 100 100 100 16

Details of financial assets sold for asset reconstruction 5 5 10 100 100 100

17

Details of non performing financial assets purchased /sold 5 5 10 100 100 100

18 Provision on standard assets 5 5 10 100 100 100 19

Interest income as a percentage to working funds 5 5 10 100 100 100

20

Non- Interest income as a percentage to working funds 5 5 10 100 100 100

21 Operating profit as a percentage to working funds 5 5 10 100 100 100

22 Return on assets 5 5 10 100 100 100 23 Business per employee 5 5 10 100 100 100 24 Profit per employee 5 5 10 100 100 100 25 Asset liability management 5 5 10 100 100 100 26 Exposure to Real Estate sector 5 5 10 100 100 100 27 Exposure to capital market 5 5 10 100 100 100 28 Risk category wise country exposure 5 5 10 100 100 100 29

Details of SGL(Single Borrower limit)\GBL (Group Borrower limit) exceeded by the Bank 5 5 10 100 100 100

30 Unsecured Advances 5 5 10 100 100 100 31

Provision for income tax made during the year 5 5 10 100 100 100

32 Disclosure of penalties imposed by RBI 5 5 10 100 100 100 33 AS 5 – Net profit and loss for the 3 3 6 60 60 60


104


Disclosures RBI GUIDELINES Public Private Total Public Private Total

period, prior period items and changes in the economic policy

34 AS 9 – Revenue recognition 4 3 7 80 60 70 35 AS 15 – Employee benefits 5 5 10 100 100 100 36 AS 17 – Segment Reporting 5 5 10 100 100 100 37 AS 18 – Related Party disclosures 4 5 9 80 100 90

38 AS 21 – Consolidated Financial statements 4 5 9 80 100 90

39 AS 22 – Accounting for taxes on income 5 5 10 100 100 100

40

AS 23 – Accounting for investment in Associates in Consolidated Financial Statements 4 5 9 80 100 90

41 AS 24– Discontinuing operations 1 0 1 20 0 10 42 AS 25 – Interim financial reporting 0 0 0 0 0 0 43 Provisions and contingencies 5 5 10 100 100 100 44 Disclosure of complaints 5 5 10 100 100 100 45 Disclosure of LoCs issued by the bank 5 5 10 100 100 100 46 Cash Flow Statement 5 5 10 100 100 100

Table 5.6 depicts that Public sector banks are giving better and high disclosure in

comparison to private sector banks for three items naming Percentage shareholding by

Govt. of India in nationalized banks, Amount raised by issue of IPDI and AS 9 – Revenue

recognition. Although disclosure for five items naming Forward rate agreement,

Exchange traded interest rate derivatives, AS 18 – Related Party disclosures, AS 21 –

Consolidated Financial statements and AS 23 – Accounting for investment in Associates

in Consolidated Financial Statements is comparatively low in case of Public sector banks.

Further there are two items naming AS 24 – Discontinuing operations and AS 25 –

Interim financial reporting are not disclosed at all by both the categories of the banks

except one public sector bank disclosing information regarding AS 24. However

information regarding AS 5 - Net profit and loss for the period, prior period items and

changes in the economic policy is equally disclosed by both the category of the banks but

the disclosure level is average as only six banks [i.e.3 public and 3 private banks]

disclosed this information. Disclosure regarding remaining 15 items is full and equal.

DISCLOSURE SCORE ON BASEL II (PILLAR 3)


105

Basel Committee on Banking Supervision has issued guidelines relating to Minimum

capital requirement, Supervisory review and Market discipline. Indian banking companies

were required to ensure full implementation of Basel II guidelines by March 31, 2009.

Information elements based on Basel committee are 35 in number. These include

Overview of the group companies, Restrictions for capital transfer within the group,

Details of surplus capital of insurance and capital shortage of all subsidiaries, Effects of

capital deduction of insurance participants on tier I and tier II capital, Description of

individual capital elements, Details of innovative and hybrid instruments, Capital

requirements in individual risk areas and capital parameters on consolidated basis,

Individual components of core capital and items which deduct capital, Information

considering core risks of the institution, Comparison between current risk profile and risk

which actually occurred (for assessing the reliability of the procedure chosen for risk

management), Details of portfolio which are using the standardized approach and their

measuring methods, Corresponding capital requirements for the interest rate risk, equity

position risk, foreign exchange risk and commodity risk, Details for which approach the

bank qualifies, Description of the risk and control procedure, Increase or decline in

earnings or economic value in case of upward and downward rates shocks, Definition of

the overdue, impaired and defaulted loans, Breakdown of credit volume according to

counter

TABLE 5.7: BASEL II (PILLAR3)

BASEL II(PILLAR3) No. of Banks Percentage of

Disclosures Scope Qualitative information Public Private Total Public Private Total 1 Overview of the group companies 5 5 10 100 100 100 2

Restrictions for capital transfer within the group 5 5 10 100 100 100

Quantitative information 3

Details of surplus capital of insurance and capital shortage of all subsidiaries 5 5 10 100 100 100

4

Effects of capital deduction of insurance participants on tier I and tier II capital 5 5 10 100 100 100

Capital structure and adequacy Qualitative information

5 Description of individual capital elements 5 5 10 100 100 100

6

Details of innovative and hybrid instruments 5 5 10 100 100 100


106


Disclosures Scope Quantitative information 7

Capital requirements in individual risk areas and capital parameters on consolidated basis 5 5 10 100 100 100

8

Individual components of core capital and items which deduct capital 5 5 10 100 100 100

Risk position and assessment General Information 9

Information considering core risks of the institution 5 5 10 100 100 100

10

Comparison between current risk profile and risk which actually occurred (for assessing the reliability of the procedure chosen for risk management) 5 5 10 100 100 100

Market Risk : Standardized Approach

Qualitative information 11

Details of portfolio which are using the standardized approach and their measuring methods 5 5 10 100 100 100


Corresponding capital requirements for the interest rate risk, equity position risk, foreign exchange risk and commodity risk. 5 5 10 100 100 100

Operational Risk Qualitative information

13

Details for which approach the bank qualifies 5 5 10 100 100 100

Interest rate risk in the banking book


Description of the risk and control procedure 5 5 10 100 100 100


Increase or decline in earnings or economic value in case of upward and downward rates shocks 5 5 10 100 100 100

Credit risk :General requirements Qualitative information

16

Definition of the overdue , impaired and defaulted loans 5 5 10 100 100 100

Quantitative information


107


Disclosures Scope

17

Breakdown of credit volume according to counter parties, regions, industries, risk concentration and NPAs 5 5 10 100 100 100

18

Charges of specific allowances and charge offs during the period 5 5 10 100 100 100

19

Breakdown of specific allowances according to sectors and regions 5 5 10 100 100 100

Credit risk : Standardized Approach

Qualitative information 20 Details via external rating agencies 5 5 10 100 100 100 21

Details specifying positions for which external ratings are used 5 5 10 100 100 100

22 Mapping of external ratings to risk classes 5 5 10 100 100 100


Breakdown of exposures over the individual risk classes 5 5 10 100 100 100

Credit risk : Equity holdings in the banking book

Qualitative information 24 Differentiation between equities held 5 5 10 100 100 100 25

Discussion of key valuation and accounting principles for the equities in the banking book 5 5 10 100 100 100


Details of book value and current value of equity 5 5 10 100 100 100

27

Capital requirements for equities for which supervisory transition is applicable 5 5 10 100 100 100

Credit risk : Risk reduction techniques


Qualitative disclosure requirements for application of credit risk mitigation techniques 5 5 10 100 100 100


For every portfolio : the total exposure which is covered by recognized financial collaterals 5 5 10 100 100 100

30

For every portfolio : the total exposure which is covered by guarantees or credit derivatives 5 5 10 100 100 100


108


Disclosures Scope Credit risk : Securitization of loans Quantitative information

31

Qualitative disclosure requirements for securitization of loans 5 5 10 100 100 100

32

Summary of accounting policies for securitization activities 5 5 10 100 100 100

33

Name of rating agencies which are used and type of securitization 5 5 10 100 100 100


Type and total amount of securitized loans, amount of NPAs and realized losses 5 5 10 100 100 100

35

Total outstanding of securitized revolving exposures 5 5 10 100 100 100

parties, regions, industries, risk concentration and NPAs, Charges of specific allowances

and charge offs during the period, Breakdown of specific allowances according to sectors

and regions, Details via external rating agencies, Details specifying positions for which

external ratings are used, Mapping of external ratings to risk classes, Breakdown of

exposures over the individual risk classes, Differentiation between equities held,

Discussion of key valuation and accounting principles for the equities in the banking

book, Details of book value and current value of equity, Capital requirements for equities

for which supervisory transition is applicable, Qualitative disclosure requirements for

application of credit risk mitigation techniques, For every portfolio : the total exposure

which is covered by recognized financial collaterals, For every portfolio : the total

exposure which is covered by guarantees or credit derivatives, Qualitative disclosure

requirements for securitization of loans, Summary of accounting policies for

securitization activities, Name of rating agencies which are used and type of

securitization, Type and total amount of securitized loans, amount of NPAs and realized

losses and Total outstanding of securitized revolving exposures

Table 5.7 makes it clear that all the selected Public and Private sector banks are following

Basel II guidelines as every single one of them is making cent percent disclosure of all

the items covered under this category.


109

VOLUNTARY BANKING DISCLOSURES

There have been 187 elements identified as voluntary disclosures under banking

regulatory framework. These elements have been divided in thirteen broad categories and

analyzed. Disclosure percentage has been calculated on the basis of maximum possible

disclosure, i.e. if all the banks disclose the element in annual reports. Results of

disclosures of each element under specified categories are as below.

DISCLOSURE SCORE ON GENERAL CORPORATE INFORMATION

This category requires disclosures related to the basic information and profile of the bank.

Six elements in total have been put in this category. These include Date of Establishment,

Registration number, Implementation of official language, Information on Associates &

Subsidiaries, Awards and Overseas assets.

TABLE 5.8: GENERAL CORPORATE INFORMATION


Disclosures

GENERAL CORPORATE INFORMATION Public Private Total Public Private Total

1 Date of establishment 3 2 5 60 40 50 2 Registration number 0 1 1 0 20 10 3

Implementation of official language 4 0 4 80 0 40

4

Information on Associates/Subsidiaries 5 5 10 100 100 100

5 Awards 5 5 10 100 100 100 6 Overseas Assets 2 1 3 40 20 30

Table 5.8 depicts that the two items naming information on Associates/Subsidiaries and

Awards is equally and fully disclosed by both the categories of the bank, whereas, one

item naming registration number is not disclosed by public sector banks but one private

sector bank is making disclosure of this. In case of information regarding implementation

of Official language, disclosure performance of public sector banks is much better and


110

high with no private sector bank disclosing this information. As far as information

regarding Date of establishment and Overseas assets is concerned, there is not much

difference between the disclosure practices of public and private sector banks but overall

disclosure level is comparatively low.

DISCLOSURE SCORE ON CORPORATE GOVERNANCE (VOLUNTARY)

This category includes all those disclosures which are related to corporate governance

practices and are not necessarily to be disclosed by the banking companies. Eleven such

disclosure elements have been identified in this category.

TABLE 5.9: CORPORATE GOVERNANCE


Disclosures CORPORATE GOVERNANCE Public Private Total Public Private Total 1

Details about the chairman (other than name/ title) background of the chairman/academic/professional/business experiences 3 2 5 60 40 50

2

Details about directors (other than name/title) background of the chairman/academic/professional/business experiences 3 2 5 60 40 50

3 Number of shares held by directors 2 2 4 40 40 40

4

List of senior managers (not on the board of directors)/senior management structure 1 3 4 20 60 40

5 Background of senior managers 1 0 1 20 0 10 6 Details of the CEO’s contact address 0 0 0 0 0 0

7 Are the independent directors well defined? 5 5 10 100 100 100

8 Picture of all directors/board of directors 3 2 5 60 40 50 9 Picture of chairperson only 4 3 7 80 60 70

10 Shareholders rights 1 2 3 20 40 30 11

Certificate of compliance of mandatory stipulations under corporate governance 2 0 2 40 0 20

These elements include Details about the chairman (other than name/ title) /

background of the chairman/ academic/ professional/ business experiences, Details about

the directors (other than name/ title) / background of the directors/ academic/

professional/ business experiences, Number of shares held by directors, List of senior


111

managers (not on the board of directors)/ senior management structure, Background of

senior managers, Details of CEO's contact address, Are the independent directors well

defined?, Directors' engagement/ directorship of other companies, Picture of all directors /

board of directors and Picture of Chairperson and Shareholders right.

Table 5.9 reveals poor disclosure performances regarding three items, namely,

Background of senior managers, Details of the CEO’S contact address and Certificate of

compliance under Corporate governance as no private sector bank is making disclosure

of any of these items in their annual reports, although information regarding Background

of senior managers and Certificate of compliance under corporate governance is disclosed

by very few public sector banks with information on Details of CEO’s contact address is

still not disclosed by any of the public sector banks. Furthermore, there is one item

naming, Are the independent directors well defined is disclosed fully by all the selected

public and private sector banks. There are few items in regard to which disclosures made

by both the categories of selected banks are equal but the disclosure level is not very high.

In addition to this Information on Number of shares held by directors is equally given by

selected public and private sector banks with disclosure level being minimal. However

disclosure level in relation to two items has been observed to be low in case of public

sector banks in comparison to private sector banks. These items are List of senior

managers (not on the board of directors)/senior management structure and shareholders

rights.

DISCLOSURE SCORE ON FINANCIAL PERFORMANCE

Besides the information disclosed in Balance sheet and Profit & loss account, some useful

pieces of financial information can also be disclosed elsewhere in the annual report. Such

disclosures in general include 37 elements named Qualitative forecast of earnings, Return

on equity, Net interest margin, Cost-to-income ratio, Earnings per share, Risk-weighted

assets, Debt-to-equity ratio, Total liquid assets to assets ratio, Total liquid assets to

deposit ratio, Loan to deposit ratio, Dividend per share, Provision coverage ratio, Book

value per share, Yield on advances, Yield on investment, Yield on funds, Cost of

Deposits, Cost of funds, Non interest income to Operating income, Asset utilization ratio,

Non- interest income to Total income, Non-interest income to Net income, Dividend

payout ratio, Percentage of Net NPA to customer assets, Percentage of Gross NPA to


112

Gross Advances, Deposits mobilization, Business highlights, Ratio of establishment

expenses to total expenses, Ratio of other operating expenses to total expenses,

Performance of Bank’s share price in comparison with the stock exchanges, Productivity

per employee, Percentage increase in Bank advances during the year, Credit deposit ratio,

Amount of Income from Third party product, Export credit information, Information on

Retail credit and Net worth.

TABLE 5.10: FINANCIAL PERFORMANCE

No. of Banks Percentage of

Disclosures FINANCIAL PERFORMANCE Public Private Total Public Private Total 1 Qualitative forecast of earnings 0 1 1 0 20 10 2 Return on equity 3 2 5 60 40 50 3 Net interest margin 3 2 5 60 40 50 4 Cost-to-income ratio 4 0 4 80 0 40 5 Earnings per share 5 5 10 100 100 100 6 Risk weighted assets 5 5 10 100 100 100 7 Debt to equity ratio 0 0 0 0 0 0 8 Total liquid assets to assets ratio 0 0 0 0 0 0 9 Total liquid assets to deposits ratio 0 0 0 0 0 0 10 Loan to deposit ratio 0 0 0 0 0 0 11 Dividend per share 2 1 3 40 20 30 12 Provision coverage ratio 3 5 8 60 100 80 13 Book value per share 4 4 8 80 80 80 14 Yield on advances 3 1 4 60 20 40 15 Yield on investment 2 0 2 40 0 20 16 Yield on funds 4 0 4 80 0 40 17 Cost of Deposits 3 1 4 60 20 40 18 Cost of funds 4 0 4 80 0 40

19 Non-interest income to Operating income 1 0 1 20 0 10

20 Asset utilization ratio 1 0 1 20 0 10 21 Non- interest income to Total income 2 0 2 40 0 20 22 Non-interest income to Net income 1 0 1 20 0 10 23 Dividend payout ratio 1 1 2 20 20 20

24 Percentage of Net NPA to customer assets 0 1 1 0 20 10

25 Percentage of Gross NPA to Gross Advances 1 4 5 20 80 50

26 Deposits mobilization 3 0 3 60 0 30 27 Business highlights 5 5 10 100 100 100 28 Ratio of establishment expenses to total 1 0 1 20 0 10


113


Disclosures FINANCIAL PERFORMANCE Public Private Total Public Private Total

expenses

29 Ratio of other operating expenses to total expenses 1 0 1 20 0 10

30 Performance of Bank’s share price in comparison with the stock exchanges 4 2 6 80 40 60

31 Productivity per employee 1 0 1 20 0 10

32 Percentage increase in Bank advances during the year 2 0 2 40 0 20

33 Credit deposit ratio 1 0 1 20 0 10

34 Amount of Income from Third party product 1 0 1 20 0 10

35 Export Credit information 1 0 1 20 0 10 36 Information on Retail credit 4 0 4 80 0 40 37 Net worth 3 2 5 60 40 50

Table 5.10 depicts that information relating to 16 items namely Qualitative forecast of

earnings, Yield on investment, Cost of Deposits, Non-interest income to Operating

income, Asset utilization ratio, Non- interest income to Total income, Non-interest

income to Net income, Percentage of Net NPA to customer assets, Deposits mobilization,

Ratio of establishment expenses to total expenses, Ratio of other operating expenses to

total expenses, Productivity per employee, Dividend per share, Percentage increase in

Bank advances during the year, Credit deposit ratio, Amount of Income from Third

party product and Export Credit information is very low and negligible by the banks

selected for this study with poor or nil disclosure on the part of private sector banks.

In addition, four items, namely cost-to-income ratio, Yield on funds, Cost of funds and

Information on retail credit which are highly disclosed by public sector banks but

remained undisclosed by private sector banks. Furthermore disclosure regarding

information on two ratios naming Return on equity and Net interest margin is almost

equal but low by both the categories of the banks.

In addition to this, there are five items which are equally disclosed by all the selected

public and private sector banks with information on Earning per share, Risk weighted

assets, Business highlight and Book value per share remain highly disclosed and dividend

payout ratio remain poorly disclosed by both the categories of selected banks. However

information on Debt to equity ratio, Total liquid assets to assets ratio, Total liquid assets

to deposit ratio and Loan to deposit ration remain undisclosed by all the selected banks of


114

study. Further public sector banks are giving better disclosures than private sector banks

on information related to yield on advances, Performance of banks share price in

comparison with stock exchanges and Net worth. Lastly, there are two items naming

Provision coverage ratio and Percentage of gross NPA to gross advances in relation to

which public sector banks lacked far behind in disclosure performance than private sector

banks. At the end, we can say that overall disclosure performance of private sector banks

is comparatively poor than public sector banks under this category.

DISCLOSURE SCORE ON INFORMATION RELATING TO KEY PERSONNEL

INFORMATION

This category has information which is related to the Key personnel of the bank. It

includes five elements and those elements are Profile of directors seeking appointment

and reappointment, Percentage of shareholding by directors, Key management personnel

information, Training and development of employees, Awards to employees.

TABLE 5.11: INFORMATION RELATING TO KEY PERSONNEL


Disclosures

INFORMATION RELATING TO KEY MANAGEMENT PERSONNEL Public Private Total Public Private Total

1 Profile of directors seeking appointment and reappointment 3 4 7 60 80 70

2 Percentage of shareholding by directors 0 2 2 0 40 20

3 Key management personnel information 2 3 5 40 60 50

4 Training and development of employees 5 5 10 100 100 100

5 Awards to employees 0 0 0 0 0 0

Table 5.11 clearly shows that Private sector banks are leading in disclosure performance

than Public sector banks in this category of Information relating to Key personnel.

However there is one item naming training and development of employees where both

public and private sector banks selected for study are giving 100 disclosures and another

item naming Awards to employees remain undisclosed by both the categories of the


115

banks. In case of all the remaining items disclosure level is average with private sector

banks giving better disclosure than public sector banks.

DISCLOSURE SCORE ON CORPORATE STRATEGY

This category has nineteen elements named Management's objectives and strategies/

corporate vision / motto / statement of corporate goals or objectives, Future strategy-

information of future expansion (capital expenditures) / general development of business ,

Impact of strategy on future results, new products and services, third party products,

disclosure regarding future incentives, forex business, education loan, gold coins, UID

cards, E-stamping, gold loans, mobile banking, internet banking, international banking,

Hindi software, marketing and publicity and use of Hindi in publicity.

TABLE 5.12: CORPORATE STRATEGY


Disclosures CORPORATE STRATEGY Public Private Total Public Private Total

1

Management objectives and strategies/corporate vision/ motto/ statement of corporate goals or objectives 2 2 4 40 40 40

2

Future strategy – Information of future expansion (capital expenditure)/general development of business 2 2 4 40 40 40

3 Impact of strategy on future results 2 2 4 40 40 40 4 New products and services 2 3 5 40 60 50 5 third party products 4 1 5 80 20 50 6 Bancassurance business 5 2 7 100 40 70 7 Disclosure regarding future initiatives 4 1 5 80 20 50 8 Forex business 3 1 4 60 20 40 9 Education loan 2 0 2 40 0 20

10 Gold coins 2 0 2 40 0 20 11 UID cards 2 0 2 40 0 20 12 E stamping services 1 0 1 20 0 10 13 Gold loans 1 1 2 20 20 20 14 Mobile banking services 4 2 6 80 40 60 15 Internet Banking 4 5 9 80 100 90

16 Information on international banking facilities 4 3 7 80 60 70


116


Disclosures CORPORATE STRATEGY Public Private Total Public Private Total

17 Hindi software 1 0 1 20 0 10 18 Marketing and publicity 5 4 9 100 80 90 19 Use of Hindi in publicity 2 0 2 40 0 20

In this category of corporate strategy Table 5.12, shows that in case of very few items

naming marketing and publicity, Information on International banking facilities and

Internet banking, the disclosure level by both the categories of the banks is almost equal

and high. In respect of all the remaining items, disclosure level is poor of nil with Public

sector banks are having edge over private sector banks.

DISCLOSURE SCORE ON GENERAL RISK MANAGEMENT

Five elements have been identified and put under this category. These elements include

Discussion of overall risk management philosophy and policy, Narrative discussions on

risk assets, risk measurement and monitoring, Discussion on risks rise, how risk are

managed and controlled and Inform nation on Risk management committee.

TABLE 5.13: GENERAL RISK MANAGEMENT


Disclosures GENERAL RISK MANAGEMENT Public Private Total Public Private Total 1

Disclosure of overall risk performance philosophy and policy 5 5 10 100 100 100

2 Narrative discussion on risk assets, risk measurement and monitoring 5 5 10 100 100 100

3 Discussion on risks rise, how risk are managed and controlled 5 5 10 100 100 100

4 Whether and how hedges and derivatives are used to manage risks 5 5 10 100 100 100

5 Information on risk management structure 5 5 10 100 100 100

Table 5.13 shows that full disclosure is made by both the categories of the selected banks.

Hence, the disclosure score is 100.

DISCLOSURE SCORE ON KEY NON FINANCIAL STATISTICS


117

Key non-financial statistics which can be disclosed by banks in the annual reports include

Details of branch location, Number of branches, Number of branch expansion during the

year, Information on branch computerizations, Information on ATM, Location of ATM

and their address, NRI Portfolio (NRI Branches), Information of Data centre and MIS,

Retail Assets branches, Product wise capabilities, Information on Financial inclusion,

Information on credit card business, Information regarding debit cards.

TABLE 5.14: KEY NON FINANCIAL STATISTICS


Disclosures

KEY NON FINANCIAL STATISTICS Public Private Total Public Private Total

1 NRI Portfolio (NRI Branches) 0 1 1 0 20 10 2 Details of branch location 0 2 2 0 40 20 3 Number of branch 5 5 10 100 100 100 4

No. of branch expansion during the year 2010-11 5 5 10 100 100 100

5

Information on branch computerizations 3 1 4 60 20 40

6 Information on ATM 4 5 9 80 100 90 7 Location of ATM and their address 0 0 0 0 0 0 8 Information of Data centre and MIS 2 1 3 40 20 30 9 Information regarding debit cards 2 2 4 40 40 40

10 Retail Assets branches 2 0 2 40 0 20 11 Product-wise capabilities 1 0 1 20 0 10 12 Information on Financial inclusion 5 4 9 100 80 90 13 Information on credit card business 4 1 5 80 20 50

It is clear from the Table 5.14 that, there is one item naming location of ATM with

address, which is not disclosed at all by any of the banks selected for the study. However

in case of two items, 100 disclosures are made by both the public and private sector

banks. These items are - Number of branches and Number of branch expansion during the

year 2010-11. Apart from this information relating to the Debit cards is equally disclosed

by both categories of the banks. There are few items, in relation to which, disclosure

level of Public sector banks is much better than Private sector banks. These items are

Information on branch computerization, Information on financial inclusion and

Information of credit card business. However, in case of two items naming Retail Assets


118

branches and Product-wise capabilities, the disclosure level is zero in case of private

sector banks and very low in case of public sector banks. In opposite to this, there are two

items naming NRI portfolio and Details of branch location, where disclosure level is zero

in case of Public sector banks and is low in case of Private sector banks.

DISCLOSURE SCORE ON EMLOYEE RELATED INFORMATION

This section includes the information which is related to the employees of the banks. Age

of key employee, ESOP/ESOS, Information on welfare of employees and Awards to

employees are included is this heading.

TABLE 5.15: EMPLOYEE RELATED INFORMATION


EMPLOYEE RELATED INFORMATION Public Private Total Public Private Total

1 Age of key employee 0 0 0 0 0 0 2 ESOP/ESOS 1 3 4 20 60 40 3

Information on welfare of employees 3 2 5 60 40 50

4 Awards to employees 0 0 0 0 0 0

Table 5.15 discloses that Banks have not disclosed much of the information related to the

employees. Awards to employees and Age of key employees remained missing from the

annual reports of both the selected public and private sector banks. However Information

relating to ESOP/ESOS is fairly disclosed by private sector banks with poor disclosure by

Public sector banks. Moreover, the case in different for Information on welfare of

employees, where almost equal disclosure is given by both the categories of the selected

banks with 3 out of 5 public sector banks and 2 out of 5 in case of private sector banks

are making disclosure.

DISCLOSURE SCORE ON DISCLOSURE REGARDING COMMITTEES


119

Every bank forms committees to improve the performance of the bank. This category has

twenty one elements Management committee, Nomination committee, NPA Review

committee, Fraud Monitoring committee, Customer service committee, Premises

committee, Risk Management committee, IT Committee, Share transfer scrutiny

committee, Share transfer committee, Advances/credit approval committee, Staff and

development committee, Compensation committee, Legal Committee, Director

Promotion committee, Flat purchase

TABLE 5.16: DISCLOSURE REGARDING COMMITTEES


DISCLOSURE REGARDING COMMITTEES Public

Private

Total Public Private Total

1 Management committee 5 3 8 100 60 80 2 Nomination committee 3 5 8 60 100 80 3 NPA Review committee 0 1 1 0 20 10 4 Fraud Monitoring committee 4 5 9 80 100 90 5 Customer service committee 4 4 8 80 80 80 6 Premises committee 0 2 2 0 40 20 7 Risk Management committee 4 4 8 80 80 80 8 IT Committee 4 3 7 80 60 70 9 Share transfer committee 3 0 3 60 0 30

10 Share transfer scrutiny committee 2 0 2 40 0 20

11 Advances/Credit approval committee 2 1 3 40 20 30

12 Staff and development committee 1 1 2 20 20 20 13 Compensation committee 0 4 4 0 80 40 14 Legal Committee 0 2 2 0 40 20 15 Director Promotion committee 1 0 1 20 0 10 16

Flat purchase committee (residential flats)

1

0

1

20

0

10

17 Share allotment committee 2 0 2 40 0 20 18 Finance committee 1 1 2 20 20 20 19 Vigilance committee 0 1 1 0 20 10 20 HR committee 0 1 1 0 20 10 21 State level banker’s committee 2 1 3 40 20 30

committee (residential flats), Share allotment committee, Finance committee, Vigilance

committee, HR committee and State level banker’s committee.


120

Table 5.16 depicts that disclosure regarding 14 items naming NPA Review

committee, Premises committee, Share transfer scrutiny committee, Advances/credit

approval committee, Share transfer committee, Staff and development committee, Legal

Committee, Director Promotion committee, Flat purchase committee, Share allotment

committee, Finance committee, Vigilance committee, HR committee and State level

banker’s committee is very poor by both the categories of selected banks. There are few

committees which are being disclosed by public sector banks but remain undisclosed by

private sector banks and vice-versa. The reason behind such a poor disclosure for these

committees can be that every individual bank is forming committees as per their own

requirements. Apart from this there is one committee naming Share transfer committee

which not disclosed at all by selected Private sector banks with 3 out of 5 public sector

banks disclosing this information whereas another item naming Compensation committee

for which position is reverse as it is disclosed by 4 private sector banks will nil disclosure

on the part of public sector banks. Furthermore there are two committees naming

Management committee and IT committee in which public sector banks are giving more

disclosure as compared to private sector banks. On the other hand disclosure performance

of private sector banks is better in comparison to public sector banks in relation to two

committees naming Nomination committee and Fraud monitoring committee with equal

and high disclosure score by both public and private sector banks in case of Customer

service committee and Risk management committee.

DISCLOSURE SCORE ON CORPORATE SOCIAL DISCLOSURE

Being a social part of community, banks are supposed to be actively participating in

social activities. Twenty such disclosures have been identifies named Sponsoring public

health, sporting of recreational projects, Information on donations to charitable,

Information on social banking activities/banking for the society, Credit flow to women,

RTI Information, Anti money laundering, Information regarding environment

sustainability, Advances to and development in MSME sector, PSC to Adjusted Net Bank

Credit, Agriculture credit to adjusted Net Bank credit, Micro Enterprises to total Micro

and small enterprises, Weaker section credit to Net Bank credit, Bank’s exposure to

Micro Finance Institution, Advances to priority/sensitive sector/Rural Banking, Code of

Bank’s commitment to customer/operational excellence,


121

TABLE 5.17: CORPORATE SOCIAL DISCLOSURE


CORPORATE SOCIAL DISCLOSURE Public Private Total Public Private Total

1

Sponsoring public health, sporting of recreational projects 4 5 9 80 100 90

2 Information on donations to charitable 0 1 1 0 20 10 3

Information on social banking activities/banking for the society 5 4 9 100 80 90

4 Credit flow to women 2 1 3 40 20 30 5 RTI Information 3 0 3 60 0 30 6 Anti money laundering 2 2 4 40 40 40 7

Information regarding environment sustainability 2 4 6 40 80 60

8

Advances to and development in MSME sector 3 1 4 60 20 40

9 PSC to Adjusted Net Bank Credit 1 1 2 20 20 20 10

Agriculture credit to adjusted Net Bank credit 1 0 1 20 0 10

11

Micro Enterprises to total Micro and small enterprises 1 0 1 20 0 10

12

Weaker section credit to Net Bank credit 1 0 1 20 0 10

13

Bank’s exposure to Micro Finance Institutions 1 0 1 20 0 10

14 Advances to priority/sensitive sector/Rural Banking 4 1 5 80 20 50

15

Code of Bank’s commitment to customer/operational excellence 2 0 2 40 0 20

16

Disclosure regarding lead bank responsibility (District credit plan) 4 3 7 80 60 70

17

Financial literary and credit counseling centers 1 0 1 20 0 10

18 Compliances with reservation policy 1 0 1 20 0 10 19

Representation of SC/ST in staff strength 1 0 1 20 0 10

20

Disclosure regarding Information security 3 2 5 60 40 50

Disclosure regarding lead bank responsibility (District credit plan), Financial literary and

credit counseling centers, compliances with reservation policy, Representation of SC/ST

in staff strength and Disclosure regarding Information security.


122

It is clearly shown in Table 5.17 that in case of 5 items naming Information on social

banking activities/banking for the society, Advances to and development in MSME

sector, Advances to priority/sensitive sector/Rural Banking, Disclosure regarding lead

bank responsibility (District credit plan) and Disclosure regarding Information security,

disclosure performance of public sector banks is much better than private sector banks.

However, public sector banks are lacking behind in disclosure performance from private

sector banks in case of disclosure of 2 items naming Information regarding environment

sustainability and Sponsoring public health, sporting of recreational projects. Furthermore

Information relating to RTI [Right to Information Act] is not at all being disclosed by

private sector bank with three public sector banks disclosing this information. There are

four elements naming Agriculture credit to adjusted Net Bank credit, Micro Enterprises to

total Micro and small enterprises, Weaker section credit to Net Bank credit, Bank’s

exposure to Micro Finance Institutions, Financial literary and credit counseling centers,

Compliances with reservation policy and Representation of SC/ST in staff strength are

disclosed by only one public sector bank with nil disclosure on the part of private sector

banks. Remaining all the items are poorly disclosed by both public sector and private

sector and private sector banks.

DISCLOSURE SCORE ON INFORMATION REGARDING

BORROWERS/DEPOSITORS

Banks usually disclose information related to borrowers/depositors in their annual report.

This category includes 8 such elements named Total deposits of twenty largest depositors,

Total advances to twenty largest borrowers, Percentage of deposits of twenty largest

depositors to total deposits of the Bank, Percentage of Exposure to twenty largest

borrowers /customers to Total Exposure of the Bank on borrowers /customers, Total

Exposure to twenty largest borrowers / customers, Percentage of advances to twenty

largest borrowers to total advances of the bank, Total Exposure to top four NPA accounts

and Sector wise NPAs


123

Table 5.18 clearly shows that all the items in this category are highly disclosed by both

the categories of the banks with slightly better performance on the part of private sector

banks as almost all the elements are fully disclosed by them.

TABLE 5.18: INFORMATION REGARDING BORROWERS/DEPOSITORS


Disclosures

INFORMATION REGARDING BORROWERS/DEPOSITORS Public Private Total Public Private Total

1

Total deposits of twenty largest depositors 4 5 9 80 100 90

2

Percentage of deposits of twenty largest depositors to total deposits of the Bank 4 5 9 80 100 90

3

Total advances to twenty largest borrowers 4 5 9 80 100 90

4

Percentage of advances to twenty largest borrowers to total advances of the bank 4 5 9 80 100 90

5

Total Exposure to twenty largest borrowers / customers 4 5 9 80 100 90

6

Percentage of exposure to twenty largest borrowers/customers to Total Exposure of the Bank on borrowers/customers

4

5

9

80

100

90

7 Total Exposure to top four NPA accounts 4 5 9 80 100 90 8 Sector wise NPAs 4 4 8 80 80 80

DISCLOSURE SCORE ON INFORMATION/FORMS FOR SHAREHOLDRES

TABLE 5.19: INFORMATION/FORMS FOR SHAREHOLDERS


INFORMATION/FORMS FOR SHAREHOLDERS Public Private Total Public Private Total

1 Information regarding unclaimed dividend 5 5 10 100 100 100 2

Information regarding term of statutory auditors 0 2 2 0 40 20

3 Proxy form and attendance slip 4 4 8 80 80 80

4 National Electronic Clearing system (NECS) 3 4 7 60 80 70

5 National ECS form 1 3 4 20 60 40 6 Depository participant’s services 3 1 4 60 20 40 7 Application supported by blocked amount 2 0 2 40 0 20 8 Statement showing details of locked in 1 0 1 20 0 10


124

shares

9 Voting rights 1 1 2 20 20 20 10 Procedure for appointment of proxy 5 4 9 100 80 90 11 List of top five shareholders of the bank 1 2 3 20 40 30 12 ISIN Code/Number 4 4 8 80 80 80

There are twelve such items have been identified and put under this category. These items

are named Information regarding unclaimed dividend, Information regarding term of

statutory auditors, Proxy form and attendance slip, National Electronic Clearing system

(NECS), National ECS form, Depository participant’s services, Application supported by

blocked amount, Statement showing details of locked in shares, Procedure for

appointment of proxy, Voting rights, List of top five shareholders of the bank and ISIN

Code/Number

In the table 5.19 there are four items named Information regarding term of statutory

auditors, Application supported by blocked amount, Statement showing details of locked

in shares and Voting rights, where the level of disclosure is almost negligible by both the

categories of the banks. Further, three items naming, Information regarding unclaimed

dividend, proxy form and attendance slip and ISIN code/no. are highly and equally

disclosed by public and private sector banks. In case of two items, performance of private

sector banks is slightly better than public sector banks. These items are National ECS

form and List of top five shareholders. Apart from this, disclosure performance relating to

two items naming, Depositary participant services and Procedure for appointment of

proxy is better in case of public sector banks in comparison to private sector banks.

DISCLOSURE SCORE ON MISCELLANEOUS INFORMATION

Any information which cannot be put in the above mentioned categories has been put in

this category of miscellaneous information. Twenty six such elements have been

identified. These include Information on Chairman’s/MD’s report, ISO 9001: 2000

certification, Graphical presentation of performance indicators, Performance at a glance-3

year, Review of other products and services, Publications, Bilingual Report, Benchmark

prime lending rate (BPLR), Macro Economic scenario, Disclosure regarding Movement

of interest rates, Domestic economic scenario, Progress under different plans,


125

Restructuring of debt, Asset quality and NPA management, Recovery under SARFAESI

Act 2002, Visit of parliamentary committee, Government business, IT initiatives,

Strategic investment, Credit rating, Accounts under US GAAP, Information on Industrial

relations, Promoting financial awareness, Conscious corporate citizen, Bullion

Banking/precious metal business, Loan review mechanism and Bullion Banking/precious

metal business.

It is evident from table 5.20 that information relating to five items namely, Information on

ISO 9001: 2000 certification, Review of other products and services, Progress under

different plans, Restructuring of debt, Visit of parliamentary committee, Government

business, Strategic investment, Information on Industrial relations, Promoting financial

TABLE 5.20: MISCELLANEOUS INFORMATION


Disclosures Miscellaneous information Public Private Total Public Private Total 1 Chairman’s/MD’s report 5 5 10 100 100 100 2

Information on ISO 9001: 2000 certification 2 0 2 40 0 20

3

Graphical presentation of performance indicators 3 5 8 60 100 80

4 Performance at a glance-3 year 2 5 7 40 100 70 5 Review of other products and services 1 0 1 20 0 10 6 Publications 3 2 5 60 40 50 7 Bilingual Report 5 0 5 100 0 50 8 Benchmark prime lending rate (BPLR) 3 2 5 60 40 50 9 Macro Economic scenario 5 3 8 100 60 80 10 Domestic economic scenario 4 0 4 80 0 40 11

Disclosure regarding Movement of interest rates 5 5 10 100 100 100

12 Progress under different plans 1 0 1 20 0 10 13 Restructuring of debt 1 0 1 20 0 10 14 Asset quality and NPA management 5 2 7 100 40 70 15 Recovery under SARFAESI Act 2002 3 0 3 60 0 30 16 Visit of parliamentary committee 1 0 1 20 0 10 17 Government business 2 0 2 40 0 20 18 IT initiatives 3 3 6 60 60 60 19 Strategic investment 1 0 1 20 0 10 20 Credit rating 3 5 8 60 100 80 21 Accounts under US GAAP 4 5 9 80 100 90 22 Information on Industrial relations 2 2 4 40 40 40


126

23 Promoting financial awareness 1 1 2 20 20 20 24 Conscious corporate citizen 1 1 2 20 20 20 25 Loan review mechanism 2 3 5 40 60 50 26

Bullion Banking/precious metal business 2 0 2 40 0 20

awareness, Conscious corporate citizen and Bullion Banking/precious metal business is

poorly disclosed by both public and private sector banks. In addition to this, disclosure

performance relating to three items naming Publications, Benchmark Prime Lending Rate

and IT initiatives is average. Furthermore performance of public sector banks is much

better than private sector banks in case of information on Bilingual report,

Macroeconomic scenario and Asset quality and NPA management, whereas they are

lacking behind in the disclosure relating to Graphical presentation of performance

indicators, Performance at glance-3 years, Credit rating and Account under US GAAP.

Two items naming Chairman’s/MD’s report and Disclosure regarding movement of

Interest rates is fully and equally disclosed by both public and private sector banks.

Finally, there are two items naming Domestic economic scenario and Recover under

SARFASEI Act is highly disclosed by public sector banks with nil disclosure on the part

of private sector banks.


127

CHAPTER 6

SUMMARY & CONCLUSIONS

Disclosure is the process through which an entity communicates with the outside world

(Chandra, 1974). Disclosure refers to the publication of any economic information

relating to a business enterprise, quantitative or otherwise, which facilitates the making of

investment decisions (Choi, 1973). The American Accounting Association defines it as

“the movement of information from private (i.e., inside information) into the public

domain.” It emerges from these definitions that disclosure means reporting of

quantitative and qualitative information of financial and non-financial nature regarding

the reporting, entity to outsiders for the purpose of their decision making. Information

about the affairs of the company can be communicated through different media viz.

prospectus, financial press releases, annual report, interim reports and personal contacts

with company officials. In addition, newspapers, business and industry magazines,

investment advisory services and government statistics also provide information about a

company. Despite the existence of different sources of information, the annual report is

regarded as the most important of information about a company’s affairs. Corporate

annual reports represent the most easily accessible and extremely important source of

basic information concerning an enterprise.

The central focus of corporate financial reporting has changed with the passage of time.

In the past, corporate financial reporting was oriented to providing stewardship

information, which was essentially backward looking. The essence of stewardship

reporting lies in giving an account of what management has done with the money

entrusted to it. Today, the preparation and presentation of corporate financial reports is

being driven by the consideration of providing information that is useful for making


128

economic decisions, i.e., decision oriented financial reporting. Decision oriented

financial reporting is basically concerned with providing information that will enable the

users of the financial statements to judge the ability of the company to generate cash

flows in the future. This shift in emphasis is fully reflected in the objectives of financial

statements developed by Financial Accounting Standards Board (FASB). According to

the True Blood Study Group Report, “the basic objective of financial statements is to

provide information useful for making economic decisions” (Sorter & Gams, 1974).

Disclosure of information has a greater significance in achieving accounting objectives

and for this disclosure needs to be adequate. Adequate disclosure means fair and full

disclosure so that it helps the users in making rational decisions. It reflects economic

efficiency of the resource use and thereby helps in directing the flow of capital into

productive channels. It would also prevent and mitigate fraud and manipulation. The

more the information available, the less is the opportunity for fraud and greater the

confidence in the company. Thus adequate disclosure relates particularly to

objectives of relevance, neutrality, completeness and understandability. Information

should be presented in a way that facilitates understanding and avoids erroneous

implications.

NEED OF THE STUDY

Financial disclosure is an effective communication of accounting information to its users

for decision making. The users of financial statements should be in a position to evaluate

and assess the company’s earnings performance and financial position, so that, they are

able to make intelligent investment decisions necessary for efficient allocation of scarce

resources. The aim of financial disclosure is to portray economic performance of an

enterprise. Financial information can be disclosed by using various modes, but annual

reports occupy a very significant position among them. Today there is general acceptance

of the value of fair reporting in the business community. Fair reporting brings with it

motivation, increased competitiveness, comparability and credence.

Banks are also business entities, i.e. they produce and sell financial services instead of

products. The distinctive feature about banks is that they are highly leveraged firms. They

have to foster the well being of shareholders and general public at large. The essential

part of the banking system is its financial viability. It is not only necessary for it’s


129

survival but also to discharge its various obligations. If a bank goes into trouble the entire

community is affected. Banks subsists on confidence and disclosure of prudent banking

practices is the only way to build confidence.

Further the need of the study was felt because of growing importance of corporate

governance in banks. Governance is a reform package to strengthen the banks and

corporate with the objective of making them more accountable, open, transparent,

democratic and participatory. Governance in banks is considerably a more complex issue

than in other sectors because bank activities are less transparent and thus it is more

difficult for shareholders and creditors to monitor their activities. The core of

governance rests on the quality of transparency and disclosure.

Another area which focuses on the need for present study is Basel II. Managing risk is

increasingly becoming an important issue for the regulators and financial institutions.

Bank regulation is now increasingly getting risk concentric. This process had its origin in

Basel I proposals in 1988. The thrust of first accord was adequate capitalization of banks

in relation to credit risk, the second accord recognizes that banks face a number of risks in

the form of credit, market and operational risk. Basel II is built around three pillars –

minimum capital requirement, supervisory review and market discipline. Pillar three

provides a comprehensive menu of public and regulatory disclosures related to capital

structure, capital adequacy, risk assessment and risk management process to enhance

transparency in banking operations. Thus, Basel II provides a list of desirable best

practices for banking safety and efficiency.

Protecting the interest of the depositors becomes a matter of paramount importance to

banks. Regulators, the world over, have recognized the vulnerability of depositors to the

whims of managerial misadventures in banks and therefore have been regulating the

banks more tightly than other corporate. Thus there seems to be a little question

concerning the need for serious research in the area of reporting practices of commercial

banks.

OBJECTIVES OF THE STUDY

The objectives of the study have been as below –


130

1. To examine the disclosure practices of commercial banks in India over the period

of study.

2. To compare the disclosure practices of selected private sector banks with the

public sector banks.

3. To find out highly disclosed and least disclosed elements of banking disclosures.

4. To examine the discriminatory power of total, mandatory and voluntary

disclosures in relation to public and private sector banks.

5. To make suggestions for improving the quality of disclosure.

Corresponding to the aforesaid objectives, the following sets of broad hypothesis

1. Ho (1): There are no significant differences in the disclosure practices of public

sector banks and private sector banks.

Ha (1): There are significant differences in the disclosure practices of public sector

banks and private sector banks.

2. Ho (2): There are no significant differences in the reporting of various elements of


Ha (2): There are significant differences in the reporting of various elements of


The study is based upon 10 commercial banks – 5 each selected from public and private

sector. The time frame of the study is one financial year i.e. 2010-11. Annual reports of

the selected banks were collected/ downloaded from their websites for further analysis.

Mandatory disclosures contain 161 items. The top most position is achieved by Dena

bank which has disclosed the maximum information of 155 items. On the other hand,

Bank of India has been at the bottom of the ladder that is, tenth rank, which provided the

least information of merely 144 items. Second position is being grabbed by Allahabad

Bank who disclosed 152 items. Karur Vysya Bank is right behind Allahabad Bank at third

rank with 151 disclosure scores. Chasing Karur Vysya Bank is Oriental Bank of

Commerce and Indusind Bank, both at fourth ranks with same 150 disclosure scores.

Furthermore Corporation Bank with 149 disclosure scores attained sixth rank. Next to it

are three banks, namely, HDFC Bank, J&K Bank and South Indian Bank, all are at


131

seventh rank having disclosure score of 148. Apparently, private sector banks are lacking

behind the public sector banks in respect of mandatory disclosures. The imperative of the

hour is to adopt strict regulatory measures for healthy Banking development.

Banks also disclosed some information voluntarily. There were 187 disclosures being

provided voluntarily by various banks. Dena Bank here again has grabbed first rank by

disclosing maximum number of 99 items out of 187 total disclosures. Bank of India has

achieved second rank and has missed the first rank by only two items as it disclosed 97

items. However Allahabad Bank has achieved third position and fourth rank is attained by

Corporation Bank with the disclosure score of 92 and 90 respectively. Oriental Bank of

Commerce managed to have fifth rank by disclosing 82 items. Moreover South Indian

Bank holds sixth rank in this table by getting disclosure score of 79.HDFC Bank got

seventh rank, Indusind Bank managed eighth rank and J&K Bank survived to get ninth

rank with the disclosure scores of 74, 73 and 69 respectively. Karur Vysya Bank has

disclosed least information of only 64 items and have been attained the lowest rank.

Item-wise analysis of banking disclosures was also examined. In total 348 elements under

20 categories have been covered in his study. To analyze element wise disclosures,

simple frequencies and percentages have been used. There have been 161 elements

identified as mandatory disclosures under banking regulatory framework. These elements

have been divided in seven broad categories and analyzed. All these items have been

disclosed by all the selected public and private sector banks during the year 2010-11.

Hence, the disclosure score is 100 in this category. Similar results also holds true in

respect of private as well as public sector banks. The information related to disclosures of

various profit & loss account elements have been disclosed by all the selected public and

private sector banks in the selected year of study. Hence, the category disclosure is 100.

Except one item named Material changes and commitments affecting the financial

position of the company in which disclosure performance of public sector banks is

slightly low than private sector banks as this information is disclosed by 3 public sector

banks in comparison to 4 private sector banks disclosing this information. This may be

because of two reasons, either no material change has occurred in the bank’s financial

position or banks are voluntary hiding this information. Disclosure regarding Internal

Control System and their adequacy is low in case of public sector bank as only two out of


132

five public sector banks are disclosing this information. But in case of private sector

banks disclosure of this item is quite high as it is disclosed by four out of five banks, total

disclosure however is average. The reason for poor disclosure by public sector banks can

be that they do not have internal control system or it is not working effectively.

Disclosures relating to penalties imposed by SEBI, Dematerialization of shares and

liquidity, Number of complaints not solved to the satisfaction of shareholders, Number of

shareholders’ complaints received so far, Name and designation of compliance officer

and Number of board meetings held with date is better in case of Public sector banks,

whereas disclosure regarding the items naming Composition of remuneration committee,

Name of members and chairperson of remuneration committees, Attendance in the

meetings of remuneration committee and Newspapers wherein results normally published

is much better in case of Public sector banks as these items are being disclosed by almost

all the public sector banks with only 2 or 3 private sector banks disclosing this

information. Position is reverse in case of few items, where disclosure performance of

public sector banks is poor in comparison to private sector banks. There is one item,

naming Procedure for postal ballot, which remained undisclosed by all the selected Public

and Private sector banks. Furthermore in case of few items, there is no difference between

the disclosure practices of the public and private sector banks although the disclosure

level is very low. These items are Details of remuneration to all directors as per format,

Disclosures relating to non compliance by the Company (SEBI guidelines) and

Outstanding GDRs/ADRs/Warrants or any Convertible instruments and conversion date

and likely impact on equity. All the remaining items are equally and highly disclosed by

both categories of selected banks.

Public sector banks are giving better and high disclosure in comparison to private sector

banks for three items naming Percentage shareholding by Govt. of India in nationalized

banks, Amount raised by issue of IPDI and AS 9 – Revenue recognition. Although

disclosure for five items naming Forward rate agreement, Exchange traded interest rate

derivatives, AS 18 – Related Party disclosures, AS 21 – Consolidated Financial

statements and AS 23 – Accounting for investment in Associates in Consolidated

Financial Statements is comparatively low in case of Public sector banks. Further there

are two items naming AS 24 – Discontinuing operations and AS 25 – Interim financial

reporting are not disclosed at all by both the categories of the banks except one public


133

sector bank disclosing information regarding AS 24. However information regarding AS

5 - Net profit and loss for the period, prior period items and changes in the economic

policy is equally disclosed by both the category of the banks but the disclosure level is

average as only six banks [i.e.3 public and 3 private banks] disclosed this information.

Disclosure regarding remaining 15 items is full and equal. All the selected Public and

Private sector banks are following Basel II guidelines as every single one of them is

making cent percent disclosure of all the items covered under this category.

Poor disclosure performances regarding three items, namely, Background of senior

managers, Details of the CEO’S contact address and Certificate of compliance under

Corporate governance as no private sector bank is making disclosure of any of these

items in their annual reports, although information regarding Background of senior

managers and Certificate of compliance under corporate governance is disclosed by very

few public sector banks with information on Details of CEO’s contact address is still not

disclosed by any of the public sector banks.

Information relating to 16 items namely Qualitative forecast of earnings, Yield on

investment, Cost of Deposits, Non-interest income to Operating income, Asset utilization

ratio, Non- interest income to Total income, Non-interest income to Net income,

Percentage of Net NPA to customer assets, Deposits mobilization, Ratio of establishment

expenses to total expenses, Ratio of other operating expenses to total expenses,

Productivity per employee, Dividend per share, Percentage increase in Bank advances

during the year, Credit deposit ratio, Amount of Income from Third party product and

Export Credit information is very low and negligible by the banks selected for this study

with poor or nil disclosure on the part of private sector banks.

Private sector banks are leading in disclosure performance than Public sector banks in this

category of Information relating to Key personnel. However there is one item naming

training and development of employees where both public and private sector banks

selected for study are giving 100 disclosures and another item naming Awards to

employees remain undisclosed by both the categories of the banks. In case of all the

remaining items disclosure level is average with private sector banks giving better

disclosure than public sector banks.


134

In the category of corporate strategy very few items naming marketing and publicity,

Information on International banking facilities and Internet banking, the disclosure level

by both the categories of the banks is almost equal and high. In respect of all the

remaining items, disclosure level is poor of nil with Public sector banks are having edge

over private sector banks.

There is one item naming location of ATM with address, which is not disclosed at all by

any of the banks selected for the study. However in case of two items, 100 disclosures are

made by both the public and private sector banks. These items are - Number of branches

and Number of branch expansion during the year 2010-11. Apart from this information

relating to the Debit cards is equally disclosed by both categories of the banks. There are

few items, in relation to which, disclosure level of Public sector banks is much better

than Private sector banks. These items are Information on branch computerization,

Information on financial inclusion and Information of credit card business. However, in

case of two items naming Retail Assets branches and Product-wise capabilities, the

disclosure level is zero in case of private sector banks and very low in case of public

sector banks. In opposite to this, there are two items naming NRI portfolio and Details of

branch location, where disclosure level is zero in case of Public sector banks and is low

in case of Private sector banks.

Banks have not disclosed much of the information related to the employees. Awards to

employees and Age of key employees remained missing from the annual reports of both

the selected public and private sector banks. However Information relating to

ESOP/ESOS is fairly disclosed by private sector banks with poor disclosure by Public

sector banks. Moreover, the case in different for Information on welfare of employees,

where almost equal disclosure is given by both the categories of the selected banks with 3

out of 5 public sector banks and 2 out of 5 in case of private sector banks are making

disclosure.

Disclosure regarding 14 items naming NPA Review committee, Premises committee,

Share transfer scrutiny committee, Advances/credit approval committee, Share transfer

committee, Staff and development committee, Legal Committee, Director Promotion

committee, Flat purchase committee, Share allotment committee, Finance committee,


135

Vigilance committee, HR committee and State level banker’s committee is very poor by

both the categories of selected banks. There are few committees which are being

disclosed by public sector banks but remain undisclosed by private sector banks and vice-

versa. The reason behind such a poor disclosure for these committees can be that every

individual bank is forming committees as per their own requirements. Apart from this

there is one committee naming Share transfer committee which not disclosed at all by

selected Private sector banks with 3 out of 5 public sector banks disclosing this

information whereas another item naming Compensation committee for which position is

reverse as it is disclosed by 4 private sector banks will nil disclosure on the part of public

sector banks. Furthermore there are two committees naming Management committee and

IT committee in which public sector banks are giving more disclosure as compared to

private sector banks. On the other hand disclosure performance of private sector banks is

better in comparison to public sector banks in relation to two committees naming

Nomination committee and Fraud monitoring committee with equal and high disclosure

score by both public and private sector banks in case of Customer service committee and

Risk management committee.

Being a social part of community, banks are supposed to be actively participating in

social activities. In case of 5 items naming Information on social banking

activities/banking for the society, Advances to and development in MSME sector,

Advances to priority/sensitive sector/Rural Banking, Disclosure regarding lead bank

responsibility (District credit plan) and Disclosure regarding Information security,

disclosure performance of public sector banks is much better than private sector banks.

However, public sector banks are lacking behind in disclosure performance from private

sector banks in case of disclosure of 2 items naming Information regarding environment

sustainability and Sponsoring public health, sporting of recreational projects. Furthermore

Information relating to RTI [Right to Information Act] is not at all being disclosed by

private sector bank with three public sector banks disclosing this information. There are

four elements naming Agriculture credit to adjusted Net Bank credit, Micro Enterprises to

total Micro and small enterprises, Weaker section credit to Net Bank credit, Bank’s

exposure to Micro Finance Institutions, Financial literary and credit counseling centers,

Compliances with reservation policy and Representation of SC/ST in staff strength are

disclosed by only one public sector bank with nil disclosure on the part of private sector


136

banks. Remaining all the items are poorly disclosed by both public sector and private

sector and private sector banks.

Any information which cannot be put in the above mentioned categories has been put in

this category of miscellaneous information. Twenty six such elements have been

identified. Information relating to five items namely, Information on ISO 9001: 2000

certification, Review of other products and services, Progress under different plans,

Restructuring of debt, Visit of parliamentary committee, Government business, Strategic

investment, Information on Industrial relations, Promoting financial awareness,

Conscious corporate citizen and Bullion Banking/precious metal business is poorly

disclosed by both public and private sector banks. In addition to this, disclosure

performance relating to three items naming Publications, Benchmark Prime Lending Rate

and IT initiatives is average. Furthermore performance of public sector banks is much

better than private sector banks in case of information on Bilingual report,

Macroeconomic scenario and Asset quality and NPA management, whereas they are

lacking behind in the disclosure relating to Graphical presentation of performance

indicators, Performance at glance-3 years, Credit rating and Account under US GAAP.

Two items naming Chairman’s/MD’s report and Disclosure regarding movement of

Interest rates is fully and equally disclosed by both public and private sector banks.

Finally, there are two items naming Domestic economic scenario and Recover under

SARFASEI Act is highly disclosed by public sector banks with nil disclosure on the part

of private sector banks.

The sum total of all the mandatory and voluntary disclosures given by the banks is 348.

Dena Bank by disclosing maximum number of 255 items has grabbed the top most

position. Second position is attained by Allahabad Bank as it lacked behind by 10 items

as their disclosure score is 245. Bank of India by disclosing 242 items achieved third rank

and Corporation Bank managed fourth rank as it disclosed 240 items. Fifth rank being

awarded to Oriental Bank of Commerce for its disclosure score of 233. South Indian

Bank has taken sixth rank and seventh rank is obtained by Indusind Bank as they have a

disclosure score of 228 and 224 respectively. Eighth rank is acquired by HDFC Bank by

scoring 223. J & K Bank and Karur Vysya Bank have reached ninth and tenth position

respectively, their disclosure scores being 218 and 216 marks correspondingly.


137

Average Disclosure score of public sector banks was estimated at 243 as compared to 222

of private sector banks. The difference between the two means is significantly different.

However, there were no difference in the average score under mandatory disclosure, the

average score being 149 and 150 respectively for private and public sector banks.

However, there were significant differences in the average disclosure score under

voluntary category. The average disclosure score was 92 for public sector banks as

compared to 72 for private sector banks. ANOVA estimates confirmed significant

difference of Total disclosure score as well as voluntary disclosure score.

Further, to supplement these results, Discriminant analysis has been used to identify

which of the disclosure (s) financial attributes/ratios have the maximum discriminatory

power to explain the variation among public sector banks and private sector banks in

India. The objective of the study has been to examine and compare the group membership

on the basis of ownership and on the basis of prior probabilities calculated by

Discriminant analysis. Ownership based grouping has been the dependent variable.

Independent variables have been the total, mandatory and voluntary disclosure scores of

public and private sector banks. As there were two groups, number of functions have been

two minus one i.e. one. The Eigen values of Discriminant function relate to the canonical

correlations and describe how much discriminating ability a function possesses. The

magnitudes of the Eigen values are indicative of the functions' discriminating abilities.

Canonical correlation has been recorded at 0.877. Thus, coefficient of determination

comes out to be 0.769. This indicates that Discriminant function has managed to explain

almost 77 percent of the variation. The total variation explained by this function shows

that this is significant function with high Eigen value of 3.347 and is causing cent per cent

variation.

Wilks’ lambda indicates the significance of the Discriminant function. The resulting

estimates were indicative of a highly significant function (p = 0.001) and provides the

proportion of total variability not explained, i.e. it is the converse of the squared canonical

correlation. Therefore, this function has unexplained variation up to approximately 23

percent only. Value of chi-square is 11.021, which is significant at 5 per cent level of

significance.


138

Standardized Canonical Discriminant Function Coefficients was also used to calculate the

Discriminant score for a given case. The score is calculated in the same manner as a

predicted value from a linear regression, using the standardized coefficients and the

standardized variables. VOL (Voluntary disclosure) is the variable created by

standardizing our discriminating variables. The distribution of the score this function is

standardized to have a mean of zero and standard deviation of one. A further way of

interpreting Discriminant analysis results is to describe each group in terms of its profile,

using the group means of the predictor variables. These are the means of the Discriminant

function scores by group for each function calculated. These group means are called

Centroids. Public sector banks have a mean of 1.636 and private sector banks have -

1.636. Cases with scores near to Centroids are predicted as belonging to that group. These

values indicate that public sector banks have greater degree of disclosure as compared

with private sector banks.

The classification table, also called a confusion table, is simply a table in which the rows

are the observed categories of the dependent and the columns are the predicted categories.

When prediction is perfect all cases will lie on the diagonal. The percentage of cases on

the diagonal is the percentage of correct classifications. The cross validated set of data is

a more honest presentation of the power of the Discriminant function than that provided

by the original classifications and often produces a poorer outcome. The cross validation

is often termed a ‘jack-knife’ classification, in that it successively classifies all cases but

one to develop a Discriminant function and then categorizes the case that was left out.

This process is repeated with each case left out in turn. This cross validation produces a

more reliable function. The argument behind it is that one should not use the case you are

trying to predict as part of the categorization process.

Thus it can be said that voluntary disclosure score has played the role of perfect

discriminator between public sector and private sector banks. Also the voluntary

disclosure score of public sector banks has been significantly higher than that of private

sector banks.


139

Appendix-I

Disclosure Index for Banks S.No. Item of Disclosure

MANDATORY DISCLOSURES

BALANCE SHEET ITEMS 1 Capital and its breakdown 2 Reserves and Surplus and their breakdown 3 Deposits and its breakdown 4 Borrowings and its breakdown 5 Other liabilities and provisions and their breakdown 6 Cash in hand and balance with RBI and their breakdown 7 Balance with other banks and Money at call and short notice 8 Investments and its breakdown 9 Advances and their breakdown

10 Fixed Assets and their breakdown


140

S.No. Item of Disclosure 11 Other assets and their breakdown 12 Contingent liabilities their breakdown 13 Bills for collection

PROFIT & LOSS ACCOUNT ITEMS 14 Interest earned and their breakdown 15 Other income and its breakdown 16 Interest expended and its breakdown 17 Operating expenses and its breakdown 18 Net Profit/Loss for the year 19 Appropriations

DIRECTOR'S REPORT 20 Director’s report 21 Statement of company’s affairs 22 Amount proposed to carry to any reserve 23 Amount recommended to be paid by way of dividend

24 Material changes and commitments affecting the financial position of the company

25 Director's Responsibility Statement

MANAGEMENT DISCUSSION AND ANALYSIS REPORT 26 Report on Management Discussion and Analysis 27 Disclosure regarding industry structure and developments 28 Disclosure regarding opportunities and threats 29 Disclosure regarding segment wise or product wise performance 30 Disclosure regarding Outlook 31 Disclosure regarding Risks and concerns 32 Disclosure regarding Internal control systems and their adequacy 33

Disclosure regarding discussions on financial performance vis-à-vis operational performance

34

Disclosure regarding material development in human resource including number of people employed

CORPORATE GOVERNANCE 35 Brief statement of companies on corporate governance 36 Composition of Board of directors 37 Category of Board of directors 38 Attendance of directors at board meetings 39 Attendance of directors at last AGM 40 Number of other boards in which the director is member or chairperson 41 Number of board meetings held with date


141

S.No. Item of Disclosure 42 Composition of audit committee 43 Name of members and chairperson of audit committee 44 Meetings and attendance during the year 45 Composition of remuneration committee 46 Name of members and chairperson of remuneration committees 47 Attendance in the meetings of remuneration committee 48 Remuneration policy 49 Details of remuneration to all directors as per format 50 Name of non executive director heading the shareholders committee 51 Name and designation of compliance officer 52 Number of shareholders’ complaints received so far 53 Number of complaints not solved to the satisfaction of shareholders 54 Number of pending complaints 55 Location and time of last three AGMs 56 Disclosure regarding special resolution passed in previous 3 AGMs 57

Disclosure regarding special resolution passed last year through postal ballot-details of voting pattern.

58 Person who conducted the postal ballot exercise 59

Whether any special resolution is proposed to be conducted through postal ballot

60 Procedure for postal ballot 61 Disclosures relating to related party transactions 62 Disclosures relating to non compliance by the Company (SEBI guidelines) 63 Disclosures relating to penalties imposed by SEBI 64 Whistle blower policy 65 Quarterly results 66 Newspapers wherein results normally published 67 Information relating to website 68 Time, date and venue of AGM 69 Date of book closure 70 Dividend payment date 71 Listing of stock exchanges 72 Stock code 73 Market price data 74 Registrar and Transfer Agents 75 Share Transfer System 76 Distribution of shareholding 77 Dematerialization of shares and liquidity

78 Outstanding GDRs/ADRs/Warrants or any Convertible instruments, conversion date and likely impact on equity

79 Address for correspondence


142

S.No. Item of Disclosure 80 Auditor’s certificate on corporate governance

RBI GUIDELINES 81 Details relating to capital adequacy ratio (Tier I and Tier II capital) 82 Percentage shareholding by Govt. of India in nationalized banks 83 Amount raised by issue of IPDI 84 Amount raised by issue of upper Tier II instruments 85 Gross and net value of investments held by bank in India and outside India 86 Securities sold under repo 87 Securities purchased under reverse repo 88 Details regarding non SLR investment 89 Forward rate agreement 90 Exchange traded interest rate derivatives 91 Disclosure relating to risk exposure in derivatives 92 Percentage of net NPAs to Net advances 93 Movement of NPAs 94 Movement of provisions for NPAs 95 Particulars of accounts restructured 96 Details of financial assets sold for asset reconstruction 97 Details of non performing financial assets purchased /sold 98 Provision on standard assets 99 Interest income as a percentage to working funds 100 Non- Interest income as a percentage to working funds 101 Operating profit as a percentage to working funds 102 Return on assets 103 Business per employee 104 Profit per employee 105 Asset liability management 106 Exposure to Real Estate sector 107 Exposure to capital market 108 Risk category wise country exposure 109

Details of SGL(Single Borrower limit)\GBL (Group Borrower limit) exceeded by the Bank

110 Unsecured Advances 111 Provision for income tax made during the year 112 Disclosure of penalties imposed by RBI 113

AS 5 – Net profit and loss for the period, prior period items and changes in the economic policy

114 AS 9 – Revenue recognition 115 AS 15 – Employee benefits 116 AS 17 – Segment Reporting


143

S.No. Item of Disclosure 117 AS 18 – Related Party disclosures 118 AS 21 – Consolidated Financial ststements 119 AS 22 – Accounting for taxes on income 120

AS 23 – Accounting for investment in Associates in Consolidated Financial Statements

121 AS 24– Discontinuing operations 122 AS 25 – Interim financial reporting 123 Provisions and contingencies 124 Disclosure of complaints 125 Disclosure of LoCs issued by the bank 126 Cash Flow Statement

BASEL II(PILLAR3) SCOPE

Qualitative information

127 Overview of the group companies 128 Restrictions for capital transfer within the group


129 Details of surplus capital of insurance and capital shortage of all subsidiaries 130 Effects of capital deduction of insurance participants on tier I and tier II capital

CAPITAL STRUCTURE AND ADEQUACY Qualitative information

131 Description of individual capital elements 132 Details of innovative and hybrid instruments


133 Capital requirements in individual risk areas and capital parameters on consolidated basis

134 Individual components of core capital and items which deduct capital

RISK POSITION AND ASSESSMENT

General Information 135 Information considering core risks of the institution 136

Comparison between current risk profile and risk which actually occurred (for assessing the reliability of the procedure chosen for risk management)

MARKET RISK : STANDARDISED APPROACH


Details of portfolio which are using the standardized approach and their measuring methods


144

S.No. Item of Disclosure Quantitative information

138

Corresponding capital requirements for the interest rate risk, equity position risk, foreign exchange risk and commodity risk.

OPERATIONAL RISK

Qualitative information 139 Details for which approach the bank qualifies

Interest rate risk in the banking book Qualitative information

140 Description of the risk and control procedure Quantitative information

141

Increase or decline in earnings or economic value in case of upward and downward rates shocks

CREDIT RISK : GENERAL REQUIREMENTS

Qualitative information 142 Definition of the overdue , impaired and defaulted loans


143 Breakdown of credit volume according to counter parties, regions, industries, risk concentration and NPAs

144 Charges of specific allowances and charge offs during the period 145 Breakdown of specific allowances according to sectors and regions

CREDIT RISK : STANDARDISED APPROACH Qualitative information

146 Details via external rating agencies 147 Details specifying positions for which external ratings are used 148 Mapping of external ratings to risk classes

Quantitative information 149 Breakdown of exposures over the individual risk classes

CREDIT RISK : EQUITY HOLDINGS IN THE BANKING BOOK

Qualitative information 150 Differentiation between equities held

151 Discussion of key valuation and accounting principles for the equities in the banking book

Qualitative information 152 Details of book value and current value of equity 153 Capital requirements for equities for which supervisory transition is applicable

CREDIT RISK : RISK REDUCTION TECHNIQUES


145

S.No. Item of Disclosure Qualitative information

154 Qualitative disclosure requirements for application of credit risk mitigation techniques


155 For every portfolio : the total exposure which is covered by recognized financial collaterals

156 For every portfolio : the total exposure which is covered by guarantees or credit derivatives

CREDIT RISK : SECURITISATION OF LOANS

Quantitative information 157 Qualitative disclosure requirements for securitization of loans 158 Summary of accounting policies for securitization activities 159 Name of rating agencies which are used and type of securitization

Quantitative information 160 Type and total amount of securitized loans, amount of NPAs and realized losses 161 Total outstanding of securitized revolving exposures

VOLUNTARY DISCLOSURES

GENERAL CORPORATE INFORMATION

162 Date of establishment 163 Registration number 164 Implementation of official language 165 Information on Associates/Subsidiaries 166 Awards 167 Overseas Assets


168 Details about the chairman (other than name/ title) background of the chairman/academic/professional/business experiences

169 Details about directors (other than name/title) background of the chairman/academic/professional/business experiences

170 Number of shares held by directors

171 List of senior managers (not on the board of directors)/senior management structure

172 Background of senior managers 173 Details of the CEO’s contact address 174 Are the independent directors well defined? 175 Picture of all directors/board of directors 176 Picture of chairperson only 177 Shareholders rights


146

S.No. Item of Disclosure 178 Certificate of compliance of mandatory stipulations under corporate governance

FINANCIAL PERFORMANCE 179 Qualitative forecast of earnings 180 Return on equity 181 Net interest margin 182 Cost-to-income ratio 183 Earnings per share 184 Risk weighted assets 185 Debt to equity ratio 186 Total liquid assets to assets ratio 187 Total liquid assets to deposits ratio 188 Loan to deposit ratio 189 Dividend per share 190 Provision coverage ratio 191 Book value per share 192 Yield on advances 193 Yield on investment 194 Yield on funds 195 Cost of Deposits 196 Cost of funds 197 Non- interest income to Operating income 198 Asset utilization ratio 199 Non- interest income to Total income 200 Non-interest income to Net income 201 Dividend payout ratio 202 Percentage of Net NPA to customer assets 203 Percentage of Gross NPA to Gross Advances 204 Deposits mobilization 205 Business highlights 206 Ratio of establishment expenses to total expenses 207 Ratio of other operating expenses to total expenses 208 Performance of Bank’s share price in comparison with the stock exchanges 209 Productivity per employee 210 Percentage increase in Bank advances during the year 211 Credit deposit ratio 212 Amount of Income from Third party product 213 Export Credit information 214 Information on Retail credit


147

S.No. Item of Disclosure 215 Net worth

INFORMATION RELATING TO KEY MANAGEMENT PERSONNEL 216 Profile of directors seeking appointment and reappointment 217 Percentage of shareholding by directors 218 Key management personnel information 219 Training and development of employees 220 Awards to employees

CORPORATE STRATEGY

221 Management objectives and strategies/corporate vision/ motto/ statement of corporate goals or objectives

222 Future strategy – Information of future expansion (capital expenditure)/general development of business

223 Impact of strategy on future results 224 New products and services 225 Third party products 226 Bancassurance business 227 Disclosure regarding future initiatives 228 Forex business 229 Education loan 230 Gold coins 231 UID cards 232 E stamping services 233 Gold loans 234 Mobile banking services 235 Internet Banking 236 Information on international banking facilities 237 Hindi software 238 Marketing and publicity 239 Use of Hindi in publicity

GENERAL RISK MANAGEMENT 240 Disclosure of overall risk performance philosophy and policy 241 Narrative discussion on risk assets, risk measurement and monitoring 242 Discussion on risks rise, how risk are managed and controlled 243 Whether and how hedges and derivatives are used to manage risks 244 Information on risk management structure

KEY NON FINANCIAL STATISTICS 245 NRI Portfolio (NRI Branches)


148

S.No. Item of Disclosure 246 Details of branch location 247 Number of branch 248 No. of branch expansion during the year 2010-11 249 Information on branch computerizations 250 Information on ATM 251 Location of ATM and their address 252 Information of Data centre and MIS 253 Information regarding debit cards 254 Retail Assets branches 255 Product-wise capabilities 256 Information on Financial inclusion 257 Information on credit card business

EMPLOYEE RELATED INFORMATION 258 Age of key employee 259 ESOP/ESOS 260 Information on welfare of employees 261 Awards to employees

DISCLOSURE REGARDING COMMITTEES

262 Management committee 263 Nomination committee 264 NPA Review committee 265 Fraud Monitoring committee 266 Customer service committee 267 Premises committee 268 Risk Management committee 269 IT Committee 270 Share transfer committee 271 Share transfer scrutiny committee 272 Advances/credit approval committee 273 Staff and development committee 274 Compensation committee 275 Legal Committee 276 Director Promotion committee 277 Flat purchase committee (residential flats) 278 Share allotment committee 279 Finance committee 280 Vigilance committee


149

S.No. Item of Disclosure 281 HR committee 282 State level banker’s committee

CORPORATE SOCIAL DISCLOSURE 283 Sponsoring public health, sporting of recreational projects 284 Information on donations to charitable 285 Information on social banking activities/banking for the society 286 Credit flow to women 287 RTI Information 288 Anti money laundering 289 Information regarding environment sustainability 290 Advances to and development in MSME sector 291 PSC to Adjusted Net Bank Credit 292 Agriculture credit to adjusted Net Bank credit 293 Micro Enterprises to total Micro and small enterprises 294 Weaker section credit to Net Bank credit 295 Bank’s exposure to Micro Finance Institutions 296 Advances to priority/sensitive sector/Rural Banking 297 Code of Bank’s commitment to customer/operational excellence 298 Disclosure regarding lead bank responsibility (District credit plan) 299 Financial literary and credit counseling centers 300 Compliances with reservation policy 301 Representation of SC/ST in staff strength 302 Disclosure regarding Information security

INFORMATION REGARDING BORROWERS/DEPOSITORS 303 Total deposits of twenty largest depositors 304 Percentage of deposits of twenty largest depositors to total deposits of the Bank 305 Total advances to twenty largest borrowers

306 Percentage of advances to twenty largest borrowers to total advances of the bank

307 Total Exposure to twenty largest borrowers / customers

308 Percentage of Exposure to twenty largest borrowers /customers to Total Exposure of the Bank on borrowers /customers

309 Total Exposure to top four NPA accounts 310 Sector wise NPAs

INFORMATION/FORMS FOR SHAREHOLDERS 311 Information regarding unclaimed dividend 312 Information regarding term of statutory auditors


150

S.No. Item of Disclosure 313 Proxy form and attendance slip 314 National Electronic Clearing system (NECS) 315 National ECS form 316 Depository participant’s services 317 Application supported by blocked amount 318 Statement showing details of locked in shares 319 Voting rights 320 Procedure for appointment of proxy 321 List of top five shareholders of the bank 322 ISIN Code/Number

MISCELLANEOUS INFORMATION 323 Chairman’s/MD’s report 324 Information on ISO 9001: 2000 certification 325 Graphical presentation of performance indicators 326 Performance at a glance-3 year 327 Review of other products and services 328 Publications 329 Bilingual Report 330 Benchmark prime lending rate (BPLR) 331 Macro Economic scenario 332 Domestic economic scenario 333 Disclosure regarding Movement of interest rates 334 Progress under different plans 335 Restructuring of debt 336 Asset quality and NPA management 337 Recovery under SARFAESI Act 2002 338 Visit of parliamentary committee 339 Government business 340 IT initiatives 341 Strategic investment 342 Credit rating 343 Accounts under US GAAP 344 Information on Industrial relations 345 Promoting financial awareness 346 Conscious corporate citizen 347 Loan review mechanism 348 Bullion Banking/precious metal business


151

S.No. Item of Disclosure

BIBLIOGRAPHY

Achalapathi, K.V. and Devarajan, Rajini, “Can Disclosure Index Model Improve CG

Compliance?: An Empirical Study”, Indian Journal of Accounting, Vol.

XXXVIII(2), June 2008, pp: 1-12

Adelopo, Ismail A., “Voluntary Disclosure Practices Among Listed Companies in

Nigeria”, January 2010. Available at SSRN: http://ssrn.com/abstract=1533445.

Ahmed, Dr. Kamran, “An Empirical Study of Disclosure Regulations in Emerging

Countries”, The Indian Journal of Commerce, Vol. L, No. 191, Part II, June 1997,

pp: 12-27.


152

Ahmed, K., & Nicholls, D., (1994). “The impact of non-financial company

characteristics on mandatory disclosure compliance in developing countries: the

case of Bangladesh”. The International Journal of Accounting Education and

Research, 29, 6277.

Athanasakou, Vasiliki E. and Hussainey, Khaled, “Forward-Looking Performance

Disclosure and Earnings Quality”, February 2010. Available at

SSRN:http://ssrn.com/abstract=1464802.

Baker, Kent H. and Haslem, J.A., “Information Needs of Individual Investors,” The

Journal of Accountancy, November 1973, pp: 64-69

Barrett, M. Edgar, “Financial Reporting Practices: Disclosure and Comprehensiveness in

International Setting”, Journal of Accounting Research, Vol. 14 No.1, Spring

1976, pp: 10-26

Barrett, M.E., “The Extent of Disclosure in Annual Reports of Large Companies in Seven

Countries”, The International Journal of Accounting Education and Research, Vol.

12, 1977, pp: 1-25

Basu, A.K., “Towards a Global Financial Reporting Language”, Indian Accounting

Review, Vol. 10 no. 1, June 2006, pp: 51-64.

Beaver, Wiliam H., “Current Trends in Corporate Disclosure”, The Journal of

Accountancy, January 1978, pp: 45.

Bergman, Nittai, K. and Roy Chowdhury, Sugata, “Investor Sentiment and Corporate

Disclosure”, Journal of Accounting Research, Vol. 46, No. 5, December 2008, pp.

1057-1083.

Bogdan, Victoria; Popa, Adinas; Pop, Cosmina Madalina and Farcance, Nicoleta,

“Voluntary Disclosure and Ownership Structure: An Exploratory Study of

Romanian Listed Companies”, February 2009. Available at

SSRN:http://ssrn.com/abstract=1345267.

Borako, Dulacha, G.; Hancock, Phil and Izan, H.Y., “Factors Influencing Voluntary

Corporate Disclosure by Kenyan Companies”, Corporate Governance: An


153

International Review, Vol. 14 No.2, March 2006, pp: 107-125. Available at

SSRN.http://ssrn.com/abstract=888861.

Bostosan, Christine A., “Disclosure Level and the Cost of Equity Capital”, The

Accounting Review, Vol. 72 No. 3, July 1997, pp: 323-349.

Buzby, S.L., “Company Size, Listed Versus Unlisted Stocks and the Extent of Financial

Disclosure”, Journal of Accounting Research’, Vol. 13, 1975, pp: 16-37

Buzby, Stephen L., “Selected Items of Information and Their Disclosure in Annual

Reports”, The Accounting Review, Vol. XLIX No. 3, July 1974, pp: 423-435.

Buzby, Stephen L., “The Nature of Adequate Disclosures”, The Journal of Accountancy,

April1974, pp: 47.

Chaddha, Sanjeev, “Indian Banking – Challenges in the New Millennium”, Professional

Banker, August 2006, pp: 39.

Chander, Subhash, “Regulation of Corporate Disclosure Practices in India”, Indian

Journal of Accountancy, Vol. XXXV (2), June 2005, pp: 20.

Chandra, G. (1975). “A study of the consensus on disclosure among public accountants

and security analysts”. The Accounting Review, 49, 733-742.

Chandra, Gyan (2001), “Corporate Business Reporting: Consensus between Preparers &

Auditors”, Indian Journal of Accounting & Finance, Vol16 No1, Oct 01-Mar02.

Chandra, Gyan, “A Study of the Consensus on Disclosure among Public Accountants and

Security Analysts”, The Accounting Review, October 1974, pp: 733.

Chandra, Gyan, “Corporate Business Reporting Consensus between Preparers and

Auditors”, Journal of Accounting and Finance, Vol. 16 No.1, October 2001 –

March 2002, pp: 3-22

Chandra, Gyan, “Information Needs of Security Analysts”, The Journal of Accountancy,

December 1975, pp: 66.


154

Chipalkatti, Niranjan, “Market Microstructure Effects of the Transparency of Indian

Banks”, National Stock Exchange, India Working Paper No. ………, 2002, pp: 1-

36

Choi, Frederick D., “Financial Disclosure and Entry to the European Capital Market”,

Journal of Accounting Research, autumn 1973, pp: 160.

Chow, Chee W. and Wong-Boren, Adrian, “Voluntary Financial Disclosures by Mexican

Firms,” The Accounting Review, July 1987, pp: 533-41

Cooke, T. E., (1992). “The impact of size, stock market listing and industry type on

disclosure in the annual reports of Japanese listed corporations”. Accounting and

Business Research, 22, 229237.

Cooke, T.E., “An Assessment of Voluntary Disclosure in the Annual Reports of Japanese

Corporations”, International Journal of Accounting, 1991, pp: 174-189

Coombs, H.M., Tayib, M. “Developing a Disclosure Index of Local Authority Published

Accounts – A comparative study of local authority published financial reports

between the U.K. and Malaysia”, www.glam.ac.uk/kus/1244/ publications.1998.

Copeland, Ronald M. and Fredericks, William, “Extent of Disclosure”, Journal of

Accounting Research, Spring 1968, pp: 106-113

Dhaliwal, Dan S.; Li, Oliver Zhen; Tsang, Albert H. and Yang, Yong George, “Voluntary

Non Financial Disclosure and the Cost of Equity Capital: The Case of Corporate

Social Responsibility”, February 2009. Available at SSRN.

http://ssrn.com/abstract=1343453.

Dhar, S.N., “Relevance of Corporate Annual Reports in Providing Information to

Individual Shareholders in India – An Exploratory Study”, Indian Accounting

Review, Vol. 5 No. 2, December 2001, pp: 46-58

Eresi, K., “Information Disclosure in Annual Reports”, The Chartered Accountant,

January 1996, pp: 45-48


155

Francis, Jennifer and Schipper, Katherine, “Have Financial Statements Lost Their

Relevance”, Journal of Accounting Research, Vol. 37 No.2, autumn 1999, pp:

319-352.

Francis, Jennifer; Nanda, Dhananjay and Olsoon, Per, “Voluntary Disclosure, Earnings

Quality and Cost of Capital”, Journal of Accounting Research, Vol. 46 No.1,

March 2008, pp: 53-99

Gibbins, Michael; Richardson, Alan and Waterhouse, John, “The Management of

Corporate Financial Disclosure: Opportunism, Ritualism, Policies and Processes”,

Journal of Accounting Research, Vol. 28 No.1, Spring 1990, pp: 121-143

Goa, Pingyang, “Disclosure Quality, Cost of Capital and Investors’ Welfare”, May 2009,

Chicago GSB Research Paper No. 08-06. Available at SSRN.


Gujral, N.S., “Corporate Governance in Banks – Setting new standards”, Chartered

Financial Analyst, May 2002, pp: 36.

Hossain, M. (2001). “The Disclosure of Information in the Annual Reports of Financial

Companies in Developing Countries: the Case of Bangladesh”. Unpublished

MPhil thesis, The University of Manchester, UK.

Hossain, M. A. (2000). “Disclosure of Financial Information in Developing Countries: A

Comparative Study of Non-financial Companies in India, Pakistan and

Bangladesh”. Unpublished Ph.D Dissertation, The University of Manchester.

Hossain, M., Tan, L. M., and Adams, M. (1994). “Voluntary Disclosure in an Emerging

Capital Market: Some Empirical Evidence from Companies Listed on the Kuala

Lumpur Stock Exchange”. The International Journal of Accounting, 29, 334-351

Hossain, Mohamed and Hammami, Helmi, “Voluntary Disclosure in the Annual Reports

of an Emerging Country: The Case of Qatar”, Advances in Accounting, Vol. 25,

2009, pp. 255-265. Available at SSRN. http://ssrn.com/abstract=1526534.

Huang, Rocco, “Bank Disclosure Index: Global Assessment of Bank Disclosure

Practices”, June 2006. Available at SSRN.http://ssrn.com /abstract=1425915.


156

Kahl, Alfred and Belkaoui, Ahmed, “Bank Annual Report Disclosure Adequacy

Internationally”, Accounting and Business Research, Summer 1981, pp: 189-196

Kant, Kamal, “Corporate Disclosure, Quality of Governance and Shareholder Value – a

study of Selected Companies in India”, Thesis for the Ph.D. submitted to the

Panjab University, Chandigarh, 2002.

Karim, W. A., (1995). “Provision of Corporate Financial Information in Bangladesh”.

Unpublished Ph.D thesis, University of Leeds, UK.

Khanna, Tarun; Palepu, Krishna G. and Srinivas, Suraj, “Disclosure Practices of Foreign

Companies Interacting with U.S. Markets”, Journal of Accounting Research, Vol.

42 No.2, May 2004, pp: 473-508.

Khanna, Yakesh and Singh, D.R., “Disclosure of Marketing Information and

Organizational Correlates”, The Chartered Accountant, March 1981, pp: 667-670.

Kohli, (1998) “Corporate Identity: the role of mission statements”, Business Horizons,

Vol.40, May/June, pp.59-66.

Kohli, Pooja, “Corporate Disclosure Practices: A Comparative Study of the Indian and

US Companies”, Thesis for the Ph.D. submitted to the Panjab University,

Chandigarh, 1998.

Lal, Dr. Jawahar, “The Quality of Corporate Financial Disclosures”, The Management

Accountant, December 1982, pp: 591-593.

Lang, Mark H. and Lundholm, Russel J., “Corporate Disclosure Policy and Analyst

Behavior”, The Accounting Review, Vol. 71, No 4, October 1996, pp: 467-492.

Lev, Baruch and Zarowin, Paul, “The Boundaries of Financial Reporting and How to

Extend Them”, Journal of Accounting Research, Vol. 37 No. 2, Autumn 1999, pp:

353-85

Maloo, M.C., “Information needs and Adequate Disclosure”, The Chartered Accountant,

March 1986, pp: 719.


157

Marston, C. (1986), “Financial Reporting on the Internet by Leading Japanese

Companies”, Corporate Communication: An International Journal, 8(1), pp. 23-

34.

McNally, G.M.; Eng. L. Hock and Hasseldine, C.R., “Corporate Financial Reporting in

New Zealand: An Analysis of User Preferences, Corporate Characteristics and

Disclosure Practices for Discretionary Information,” Accounting and Business

Research, Vol. 13, 1982, pp: 11-20

Meigs, Robert F.; Williams, Jan R.; Haka, Susan F. and Bettner, Mark S., “Accounting –

The Basis for Business Decisions”, Tata McGraw Hill, 11th Edition, 1999.

Miller, Paul, B.W., Quality of Financial Reporting”, Journal of Accountancy, April 2002,

pp: 72.

Mohanty, Ajaya Kumar, “Innovations in Banking in the Reform Era”, Professional

Banker, April 2006, pp: 29.

Papas, Antonios A., “An Assessment of Mandatory Disclosure in the Annual Reports of

Greek Firms”, Indian Journal of Accounting, Vol. XXXII, June 2002, pp: 1-14.

Patell, James M. and Wolfson, Mark A., “Good News, Bad News and the Intraday

Timing of Corporate Disclosure”, The Accounting Review, Vol. LVII, No. 3, July

1982, pp: 509-527.

Pradhan, Bibhuti B. and Patnaik, Sanjib, “Value Reporting: A Perceptive Study in India”,

The Journal of Accounting and Finance, Vol. 18 No.2, April-September 2004, pp:

51-60

Rao, K. Rajeshwar; Satyanara, Ch. And Rao, Vijay Manohar, “Adequate Disclosure – An

Essential Requirement for Ethics in Accounting”, The Journal of Accounting and

Finance, Volume 20 No. 2, April – September 2006, pp: 38-48.

Sahrawat, Kiran and David, Davis, “New-Zealand Banking Sector: Transition to

International Financial Reporting Standards”, The Journal of Accounting and

Finance, Vol. 20 No.1, October 2005 – March 2006, pp: 2-29.


158

Schipper, Katherine, “Required Disclosures in Financial Reports”, The Accounting

Review, Vol. 82, No. 2, 2007, pp: 301-326

Sengupta, Partha, “Corporate Disclosure Quality and the Cost of Debt”, The Accounting

Review, Vol. 73 No.4, October 1998, pp: 459-474.

Siegal, Joel and Dauber, Nicky, “The Need for Financial Disclosure”, The Chartered

Accountant, October 1976, pp: 277-281, 295.

Siegal, Joel and Vissichelli, Diana, “A Look at Corporate Disclosure of Information”, The

Chartered Accountant, March 1978, pp 517-519, 523.

Singh, Daya Ram, “External Users and Present Day Financial Statements in India”, The

Chartered Accountant, January 1973, pp: 437.

Singh, Kashmir, “Financial Reporting of Banking Companies in India”, The Accounting

World, June 2007, pp: 76-82

Singh, Kashmir, “Non-Mandatory Disclosure Practices of Banking Companies in India”,

The Accounting World, December 2007, pp: 9-13

Singhvi, S. S., & Desai, H. B. (1971). “An empirical analysis of the quality of corporate

financial disclosure”, The Accounting Review, 46, 129-138.

Singhvi, Surendra S. and Desai, Harsha B., “An Empirical Analysis of the Quality of

Corporate Financial Disclosure”, The Accounting Review, January 1971, pp: 129.

Sorter, George H. and Gans, Martin S., “Opportunities and Implications of the report on

Objectives of Financial Statements”, Supplement to Journal of References:

Tamboli, R.L., “Analysis of Accounting Disclosure and Investor Protection”, The Indian

Journal of Commerce, Vol. 57 No. 4, Oct-Dec. 2004, pp: 108-119

Vasal, V.K. (1997), “Accounting and Reporting for Intangibles”, Journal of Accounting

& Finance, Vol18 NO1, Oct 97-Mar 98.


159

Vasal, V.K., “Users’ Preferences, Accountants’ Inclinations and Corporate Reporting –

Some Indian Evidence,” Indian Accounting Review, Vol. 1 No.1, June 1997, pp:

76-88

Venkatesh, S., “Financial Disclosure – Mandatory or Voluntary”, The Chartered

Accountant, April 1997, pp: 48.

Wallace, R. S. O. (1994). “International and international consensus on the importance of

disclosure items in financial reports: a Nigerian case study”. The British

Accounting Review, 20, 223-265.

Wallman, Steven M.H., “The Future of Accounting and Financial Reporting, Part IV:

access Accounting”, Accounting Horizons, Vol. II No. 2, June 1997, pp: 103-116.

Wen, Xiaoyan, “Voluntary Disclosure and Investment”, December 2009, UIC College of

Business Administration, Research Paper No. 08-05. Available at SSRN.


Bhabha, C.H., (1956). Better Climate for Expansion of Indian Banking Needs, Commerce, Annual Number P.50


160

Documents

GURU ARJAN DEV INSTITUTE OF DEVELOPMENT …...Guru GURU ARJAN DEV INSTITUTE OF DEVELOPMENT STUDIES 2012 DISCLOSURE PRACTICES IN BANKING SECTOR OF INDIA A Comparative Study Dr Gursharan